Although we have recently experienced an increase of 50 points or 0.5%, of the Repo Rate, the current interest rate is still very reasonable. The average of the prime lending rate in South Africa is 12.05%. It reached an all-time high of 25.50 % in August of 1998 and a record low of 5.50 %t in December of 1962. The current rate is 8.25% which is way below the average. The current situation is still favourable to purchase property and for the following reasons:
- The current prime rate is 8.25% which is still below the twenty-five-year average of 12.05%.
- According to Business Tech the average property appreciates in value with 3.5% – 3.8% each year.
- Business Tech reminds us that property prices have shown a 4.7% increase since 2021.
- According to Paul Stevens, CEO of Just Property, affordable properties will still see good growth despite job insecurity, poor credit profiles and the increasing cost of living as affordable housing is in demand in 2022.
Remember that interest rates rise and fall all the time. It is part of the economy which we cannot control. Although the interest rate has currently risen, its long-term trend is indicating downwards, which is good news overall. Having said this one should always be in tune with the effect of interest rate increases. We will therefore discuss some guidelines to assist you when an interest rate increase is eminent.
- Acquire a home loan with a fixed interest
Financial institutions and bond originators have various products to suit the needs of their clients and the amount of risk they wish to incur. It is common knowledge that a home loan with a fixed interest rate will protect the consumer against an unwelcome interest rate hike. The downside to this is that you will be paying a higher interest rate from the start, and you will not receive a reduction in monthly payments should the interest rate decrease. The upside of this is that you can plan your monthly budget without the interference from an interest rate increase. If you are comfortable with paying more from the start and value stability and minimal risk, this might be the option to consider
- Flexible home loan – “Access bond”
If you have chosen the option of a flexible home loan it would subject, you to interest rate increases and decreases. This could be linked to an access facility which means that you would have access to a portion of the funds that you have settled on the loan. If you have been paying your home loan for several years you would have access to a lump sum of funds. You could utilise some of those funds to subsidise the monthly shortfall. This should buy you some time to improve your financial situation. It is advisable to replace the withdrawn funds from your home loan to avoid extra debt over the long term.
It would also be sensible to pay extra funds towards your home loan, like bonusses or thirteenth cheques, to reduce the effect of the said withdrawals. It is always a wise step to allocate bonusses and 13th cheques, or part thereof, towards a home loan. This should be done constantly and not only in times when interest rates are on the rise. Like they say, prevention is better than cure. Your house may not only be your biggest asset but also contributes towards family stability. That is worth protecting even if it means to sacrifice a bonus or part of your 13th cheque.
- Increase the term of your home loan
By increasing the term of your home loan, for instance from twenty years to twenty-five years, would reduce the monthly payments. Consider that by doing this you are adding five years to your home loan payments and that you will be paying more interest eventually. If we apply the same scenario as above, on a loan of R1.5 mil and extend the period with five years, it will bring about a monthly reduction of R954 in home loan repayments.
Like mentioned before, the current prime lending rate is still low and therefore buying a property with a bond is not only affordable but a great investment. However, should the interest rate increase, there are numerous ways to cope with it and in some instances even avoid it, is just a matter of planning. Spark your creativity and select an option that suits your profile best.