Fix your interest rate? Right time to buy? We get advice from one of the best in the business.
Category Property Advice
Interest rates in South Africa are at a historic low, and with a favourable lending environment currently at play, many first-time buyers are looking to enter the market. But there is far more at play when entering the market than simply looking at the interest rate and lending by the banks.
We spoke to Ashley Powell of Better Bond - South Africa's biggest bond originator - to get all the information on the current lending climate, the interest rate, whether to fix or hold, and what the future forecast is for the interest rate. Powell speaks of a positive environment but cautioned against throwing caution to the wind when looking to enter the market.
With over 30 years of experience in the industry, Powell has seen it all and admits the current environment is a positive one with a definite uptick in first-time buyers in South Africa.
"We are certainly in a favourable lending environment right now - both in terms of interest rates and transfer duty," says Powell.
"Interest rates are at historic lows and we're seeing up to 70% of our bond applications come from first-home buyers. That tells us that many long-term tenants are making the move from renting to buying because it's becoming more affordable. This is great news for homebuyers but also for investors who want to grow their property portfolio.
"Apart from low interest rates, the fact that the transfer duty threshold was pushed up to R1 million in February, has also enticed buyers who are looking in the lower end of the market - below R1 million. But we've also seen activity above R2.5 million, so it's benefiting buyers across the board. We're not only seeing buyers who are focused on paying no transfer duty, but also those who realise that having the first R1 million exempt from transfer duty, means they could perhaps buy for a bit more."
While Covid-19 has undeniably left a mark, Powell says that there are positive signs of the property market rebounding and admits that for first-time buyers, there may never have been a better time to buy in decades. But despite this, he advises caution when buying, noting that owning a house is more than simply making the bond payments.
"Our advice will always be that you must look carefully at affordability, and never forget that property ownership involves more than just paying your bond. You must take the full range of costs into account - monthly bond repayments, municipal rates and taxes, levies if you're buying sectional title property, insurance, utilities like water and electricity, and of course nowadays increasingly also fibre!
"So, it isn't as simple as saying it's becoming cheaper to buy than to rent, because it's not a straight comparison between rental costs and bond repayments, but given the low interest rates, it's becoming more affordable to buy. The determining factor must always be affordability, so look carefully at your financial situation, to see what you can afford and remember all your financial commitments."
With the interest rate having seen a significant drop of late, the question being asked by many home owners - and first time buyers - is should they look at having it fixed now or run the risk of a spike in the future. Powell says that there is no simple answer and much of it depends on the individual.
"There isn't a simple answer to the question of fixing, or not fixing, the interest rate on your home loan as each person's financial situation and their individual set of circumstances are unique. However, as a general rule, a fixed interest rate is higher than a variable one because it poses more of a risk for the bank.
"What many people don't know is that all bonds get registered with a variable interest rate as default. Only after registration can you negotiate a fixed interest rate, which is only for a limited period - usually up to 5 years, after which you will have to renegotiate again. This is probably why history shows us that fixed interest rates can be more expensive than variable ones, but this must not be construed as financial advice and every person must make their own careful calculations before deciding."
Powell also notes that it's impossible to forecast what will happen with the interest rate going forward, with so many factors at play.
"It's impossible to predict what interest rates will do, but history tells us that although rises are certain to occur over the long term, they are never sudden or dramatic. No-one expects rates to stay as low as they are, but they're also not going to rise overnight," he says.
"The prudent way to go about it is to not max out your budget when you buy, but rather to make sure that you can accommodate at least a few percentage points' rise in rates, as those could conceivably occur over time. In the meanwhile, put those extra funds to the best possible use by paying more into your bond than your minimum monthly repayments require. That way you save big on interest over time. You'd be surprised at the difference even a small amount, like R250 a month, could make in the long term. Take 5 minutes and use the Additional Payments Calculator on the BetterBond website to see how much you could save - prepare to be amazed!"
With so many new buyers preparing to enter the market, Powell has some sage advice. Shop around.
"The number one regret of many homebuyers? They wish they'd shopped around for a better interest rate deal on their bond," he stresses.
"This is a decision that could have far-reaching consequences because the typical bond term is 20 years. And this is where bond originators like BetterBond come in. If you apply for a home loan through us, the banks know they're competing for your business, and they put their best offers on the table. A client submits a single application through us, and we apply to multiple banks on their behalf, including their own.
"We offer an unbeatable combination of expert advice and long-standing relationships with the banks to get our clients the very best deals. An interest rate saving of 0.5% over a bond term of 20 years could equate to hundreds of thousands of rands, so it really is well worth your while!"
For any property related advice, get in touch with one of our Trusted Property Advisors today.
Author: The Agency Property Group
