Fixed interest rates are not beneficial for every bondholder.

If, for whatever reason, it is important to bondholders to be able to budget ahead with complete accuracy, it could be a good idea to fix the interest rate on their bonds for a stipulated period – but for most of us this is not a wise step to take as it will almost certainly result in our paying anything up to 4% more than the market rate over the one to ten year periods for which fixed rates are usually granted.

Taking as an example, a loan of above 80% on a sum above R500 000 that ABSA could insist on a 14.2% interest rate.  Although the banks are open to negotiation, this could mean that for anything up to ten years the bondholder would be paying up to 4.2% above the current rate.

If the fixed rate was for five years the rate would be 13.5% – 3.5% above the 10% present rate – and on loans smaller than R500 000, the rates would be even higher.

A simple arithmetical calculation will show that with a bond like the one mentioned, rates would have to move up at least 4% within two years for it to become beneficial for a bondholder to have a fixed rate.

The bondholder would really only benefit in the last year of the bond.

In all likelihood, he added, the bond rate will not jump 4% overnight and the sequential rate rise from 10% (current prime) to 14%, if it happens, will take a lengthy period of time.  The fixed rate option is therefore even less attractive.

Most people, said Lawrence, now think that the rates will not start rising again for at least another 12 months – and there could even be a further 0,5% drop in the next few months before this happens.

With the banks becoming a little more relaxed in their bond lending now is the time to get a bond at or below prime.  For those buying in the affordable market, fixed rates will, however, remain obligatory.

*Rob Lawrence is the national manager of Rawson

Banks start to ease up with bond applications

WITH banks beginning to relax their lending policies, there is support for a revival in the property market and now is the time to apply for a bond.

There should be a much-improved chance of being approved for a loan on favourable terms. Banks are again offering 100 percent loans and the current lower interest rates make it a better time for consumers looking to buy.

Before you even apply for a loan, check whether the property is affordable.

Determining the right price range is an essential first step to avoid wasting time looking at unsuitable properties.

A property finance consultant will take you through the exercise of establishing what you can afford, taking into account your specific financial requirements.

Monthly repayment affordability is generally calculated at 25 to 30 percent of joint gross income, but other criteria, including existing debt commitments, may affect the size of the loan that the bank will grant.

Remember that the hidden costs (transfer and bond registration fees) usually have to be paid up front and add a sizeable amount to the cost.

One way to ensure that the loan you apply for will be granted is to get a prequalification. Companies such as Mortgage Plus will, at no cost, prequalify you for a certain bond amount, which takes the stress out of applying for a bond once you have decided on buying a property. Another positive factor is that buyers who are prequalified are in a much stronger position to negotiate with sellers.

Bond applications may be declined for several reasons: you may not be able to afford the monthly loan repayments, or may require a 100 percent loan that would push the repayments beyond your reach.

Another critical consideration is your credit profile. This includes your employment history and consumer bureau results, which provide a picture of your debt and payment history. If the bank considers you a good credit risk, it will assess the value of the property to be purchased.

If this, too, meets all the relevant criteria, the loan is usually granted. The mortgage originator also often motivates the merits of a particular loan application to the bank’s credit manager.

To improve your credit record, cancel out-of-date credit cards and ensure that you pay all instalments by the due date every month.

To help the bank determine its risk, you will have to provide personal information such as bank statements, salary slips, a statement of assets and liabilities, a statement of your monthly expenses and information on your credit history, including whether you have ever been insolvent.

An originator can ensure you have all the correct paper work to avoid unnecessary delays.

Mortgage originators shop around and negotiate the best deal for customers for free. Obtaining a preferential rate of just 0.1 percent below prime can make a big difference to monthly repayments. But a mortgage originator must take more than just the rate into account and will structure a package to suit an individual.

To structure a package to suit an individual needs please phone (011)327-4489 or go to www.mortgagepluscc.co.za