Johannesburg – It is more difficult to buy a house than ever before notwithstanding lower interest rates, market statistics show.

According to Absa’s latest house price index, prices were 15.2% higher last month than a year ago.

The average house price is R1m.

There are several factors affecting the affordability of housing.

These include the broader economic environment, household indebtedness, banks’ lending criteria and the National Credit Act.

There has also been a recent decline in calculations of affordability, how house prices relate to household disposable income, and bond payments to disposable income.

In terms of the Credit Act, a household’s gross monthly income is no longer the absolute determinant when it comes to buying a house; instead, is the net disposable income, says Jacques du Toit, senior property analyst at Absa’s home loan division.

A prospective homebuyer is granted a mortgage loan on the basis of his net disposable income which is the income remaining after all household expenses have been deducted.

These expenses include statutory deductibles, such as income tax, pension contributions and unemployment insurance, says Du Toit.

In addition, all household expenses such as school fees, food and petrol, insurance premiums and investment contributions are factored in as well as payments on credit agreements such as car payments, bonds on other properties and retailers’ accounts.

The applicant’s risk profile is also examined, as well as the relationship of the home loan to the value of the property, the period of the loan and the interest rate attached to the loan.

Affordability shrinking

For a household to be able to buy an average R1m house at the current 10% interest rate it will have to afford a monthly bond payment of R9 650 over 20 years.

South Africa’s nominal average annual disposable income per capita was R29 553 in 2009, slightly up on the R28 635 for 2008.

Du Toit says the affordability of accommodation, which had improved in the past two years as a result of house prices and interest rate movements, has recently begun to deteriorate.

The affordability of housing is calculated by examining the relationship between house prices and household disposable income, as well as that of bond payments to disposable income.

Nominal house prices increased 4.4% year-on-year in the fourth quarter of 2009, while household disposable income rose 2.7%.

House prices have therefore risen more quickly than income, which means affordability comes under pressure, he says.

The ratio of bond payments to disposable income also increased in the fourth quarter.

Du Toit says this is the net result of rising house prices, the increase in household disposable income and interest rates remaining steady over the quarter.

Consumers had no support from an interest-rate cut during the quarter.

Other factors playing a role in affordability are rising property taxes and levies, as well as increasing electricity and water tariffs.

These significantly increase the cost of keeping a house.

He said the above factors make it clear that consumers are being affected on all sides in terms of affordability, which makes buying a house so much more difficult.

 - Sake24

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

Johannesburg – There are subtle hints that the interest rate cut party may be over.

For one, central bank chief and monetary decision-maker Gill Marcus says so.

She recently warned that interest rates will probably remain unchanged for some time.

Interest rates are currently at the lowest levels in almost 30 years and many economists think the next move will be higher.

Although inflation moved back into the desired target range, inflationary pressures remain in the medium term, most notably the cost of energy – which would include electricity tariff hikes and fuel price increases, said Anton Gildenhuys, CEO of Sanlam Personal Finance.

“Consumers should not get too used to paying these lower rates because the direction is bound to change and the rates will start to go up. I estimate this shift could happen within the next 12 to 18 months.”

The prospect of higher rates may tempt many home owners to .

Most banks offer you the chance to keep your rate unchanged for a specified period (usually between one to 10 years). This means that when rates go up, you won’t be affected.

There is usually no cost involved, but you will pay a penalty fee if you want to get out of the fixed interest rate agreement early. Depending on the bank, the penalty can be a percentage of the outstanding balance or an amount equal to a couple of months’ interest.               

With First National Bank, for example, if you cancel the fixed rate agreement three months before the end of the contract – and you have an outstanding balance of R500 000, with a fixed interest rate of 12% – you will pay a penalty of R14 723.

After the fixed rate term, your interest rate will revert to the variable interest rate, unless you opt to renew the fixed agreement.

If you sell the property, or want to pay off the bond, you will need to give 90 days’ written notice – otherwise the bank will charge you an extra interest amount.

Apart from benefiting when rates go up, fixing your home loan rate can bring peace of mind.

You know exactly how much you will have to pay for a certain period, making it easier to budget. If you have a limited or fixed income, you won’t have to worry about the chance that rates will shoot through the roof, which may mean you will lose your house.

But there’s a catch.

The rate at which your home loan will be fixed will be higher than what you pay currently. The rate will depend on how long you want to fix it for, the size of your loan and the size of the loan relative to the value of the property.

Careful – you could end up paying more

The current prime rate is 10%, while Absa, for example is offering fixed rates of 10.50% (one year), 11.10% (two years)  to 14.50% (10 years).

If you just took out a home loan of R1m, and you pay the prime rate of 10%, you will pay R115 800 over the next year. If you decided to fix it for the next year on 10.50%, you will pay R4 000 more.

Currently rates offered by banks to fix rates over five or 10 years in particular are quite expensive, said Gildenhuys.

To fix rates for five years on a R500 000 loan and if the size of the loan relative to the value of the property is below 80%, you can expect to pay an fixed rate of about 12.9% per year. 

“Assuming that you currently pay prime, interest rates will need to increase by 3% or more before you will start to benefit,” says Gildenhuys.

“For you to benefit over the term that you fix rates, the prime interest rate will need to increase beyond the fixed rate within the next two years or so, otherwise you will still lose out over the total term of five years.”

And then there’s the risk that interest rates won’t budge – and may even come down.

Nedbank – although it is in the minority – believes that a fragile economic recovery, together with a decline in inflation and inflationary expectations, could strengthen the case for another cut in the third quarter.

You should only consider fixing your rates now if accurate budgeting for your mortgage payments over the next few years is absolutely essential, said Gildenhuys.

“Otherwise it is quite likely to be better for you to increase your repayments now to where a fixed rate repayment would be, thereby reducing your loan much more quickly, and creating some buffer for yourself should conditions worsen materially.”- Fin24

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