Advice to Bond Applicants – take account of future rate increases

Advice to today’s bond applicants: take account of the inevitable future rates increases – or you could suffer.

With the interest rates at their lowest levels for some 30 years (the nearest we have recently come to the current levels was in April 2005 when the rate was 10,5%), home buying looks very attractive – and, says Rawson Properties MD, Tony Clarke, his group is witnessing a much stronger demand and a renewed willingness to consider homeownership.

But, warns Clarke, there is a serious danger here: many buyers will assume that the current low rates will be maintained for a long time and, thinking this way, they may easily over-commit themselves on their bond payments, only to find that when rates do rise “as they inevitably will”, they are in trouble.

“If one thing in financial circles can be predicted with absolute certainty,” said Clarke, “it is that today’s very favourable rates will not last for ever.

“One has only to look at the interest rate’s recent performance to understand how regularly changes occur – since 1990 the rate has changed 63 times. Even more significantly, the average rate over that period was 16,4% – approximately 7% higher than the current rate.”

Two or three years from now, says Clarke, interest rates could easily be at 14 or 15% again.

“While it is true that financial cycles never follow exactly the same patterns as before, it is also true that they do occur.”

So – what advice does Clarke have for the eager buyer now making plans to become a homeowner?

“Assuming that he does qualify for a bond,” says Clarke, “our advice is to pitch the bond application as if the rate will soon be 13,5%, i.e. apply for a bond roughly 20% below the maximum value which the bondholder could now be given. The applicant can work this out with a good estate agent or mortgage originator - let him just make sure that, if and when rates rise, he will not have a problem.

“For example, supposing the bond applicant has a sound credit track record and is a steady salaried employee earning ±R40 000 per month, he might qualify for a bond of R1 million – but we would suggest that he applies for a bond of R800 000. If this means that he has to opt for a less prestigious area or a similar, less luxurious home, so be it. He can upgrade later.

“This is infinitely preferable to finding when rates rise that the higher payments are causing distress.”

Just how significant future interest rises could be, said Clarke, can be seen from the fact that at current rates a R800 000 bond would cost R7 546 monthly. If and when the rates do rise to 13,5%, said Clarke, this monthly payment would rise to R9 656 – an increase of over R2 000 per month.

Clarke also repeated advice given previously, that if at all possible while rates are low, the bondholder should pay above the stipulated monthly rate and thereby shorten the payoff period and build up a savings nest egg.

“Even a few extra hundred rand paid each month will shorten the payback period by years – and it will also reduce the time before an upgrade is possible.”

CONTACT US

Speak to a home loan consultant about financing your new property or reviewing your existing mortgage. We are able to assist in lowering your bond repayments and securing attorney discounts.

Complete this short form online
Call us on 011.327.4489
Email: morne@mortgagepluscc.co.za

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White applicants for properties has been consistently less than the combined total of Black and Coloured applicants over the last three years.

The most notable of these trends is that the percentage of White applicants has been consistently less than the combined total of Black and Coloured applicants over the last three years.

The proportion of Black applicants has risen steadily over the last few years, averaging 42% during 2009. However, this percentage has dipped in the first four months of 2010 to 38%.

In contrast, the proportion of white applicants has risen from an average of 43% in 2009 to 47% during the first four months of 2010. The proportion of Asian and Coloured applicants has remained constant since the beginning of 2008, averaging 8% and 7% respectively.

According to Saul Geffen, the downward trend in the percentage of Black applicants in 2010 can likely be attributed to the fact that the tough economic conditions and stricter lending criteria have had a bigger impact on potential buyers at the lower end of the property price spectrum.

The data shows that potential Black buyers make up 60-70% of total applicants for properties valued at less than R500 000. This proportion drops significantly to around 30% for properties valued at between R500 000 and R1 million, and 10-20% for properties valued at over R1 million.

“The stricter bank lending criteria imposed under the NCA has also made it particularly tough for first time home buyers who aren’t able to meet the affordability criteria.”

However, Geffen says that as the economy recovers, the percentage of Black buyers will likely re-commence its upward trend. “We expect to see an increasing percentage of Black buyers in line with the shifting  economic base in South Africa.” 

By choosing Mortgage Plus for a loan, you will get that continual service to make sure you are getting the best deal possible.

CONTACT US

Speak to a home loan consultant about financing your new property or reviewing your existing mortgage. We are able to assist in lowering your bond repayments and securing attorney discounts.

Complete this short form online
Call us on 011.327.4489
Email: morne@mortgagepluscc.co.za

www.mortgagepluscc.co.za