Working out your bond calculations in South Africa: how much you pay right now
With interest rates likely to rise over the next few years, homeowners who haven’t looked over their bond commitments should do so, advise property experts Paul Stevens and Carl Coetzee.
“Interest rates are expected to rise gradually to 2024, so prospective bondholders should look at what they can afford beyond the current interest rates,” said Paul Stevens, CEO of Just Property. Industry predictions suggest three or four hikes in 2022, “possibly to as high as 5%”, with the repo rate expected to return to its pre-pandemic (end-2019) level of 6.50% by the close of 2024.
Stevens and Coetzee addressed some of the frequently asked questions they’re hearing from bondholders and prospective homeowners.
Should you fix your rate now?
“Home loans are awarded by default on the basis of a variable interest rate. Only once your bond has been registered can you apply for a fixed interest rate and there is a strict time limit attached before the offer lapses,” said Coetzee. “While market conditions are always a useful guide, the most important factor when deciding on whether to fix the interest rate or not should be affordability.”
Stevens noted that right now, a fixed interest rate will almost certainly be higher than a variable rate so get indicative proposals from the lending institutions. “If you are applying for a bond, comparing fixed vs variable interest rate options is a worthwhile exercise. From there, you can apply the options to your appetite for risk/ uncertainty and future prospects.”
Generally, a fixed interest rate is higher than a variable rate as it poses more of a risk to the bank. It is only negotiated at the time of bond registration and the rate offered is dependent on the going rate at that specific time, added Coetzee.
How can buyers work out the impact on payment plans?
According to Coetzee, a rise in the prime lending rate will have an impact on your monthly bond payments, but the increases that have been forecast by the South African Reserve Bank for the next three years are gradual and the prime lending rate should only hit double digits in 2024. “This means that there is still time to make the most of the accommodative lending environment,” he said.
Stevens said that home loan holders use a repayment calculator to see how their payments are likely to change and to prepare for increases. “Bond repayment calculators can help you practically understand what increases in interest rates will have on your affordability.”
The table below shows that the recent increase in the prime lending rate from 7.25% to 7.5% pushed up the bond payment on a R1 million home by only R152 per month. It also shows how monthly instalments and 20-year repayments will be impacted by the gradual increase in rates.
What is the outlook for the year?
Property data suggests that buyer activity remains strong, despite the gradual rate increase. The upward shift in rates is not unexpected, given that we have enjoyed more than a year of record-low interest rates.
“This lengthy period of low interest rates has done well to stabilise the housing property market. While buyer activity may have started to moderate, it is still above pre-pandemic levels, said Coetzee.
“Deeds office registrations increased by a significant 11.47% for the six months ending in November 2021, up from the 8.43% growth recorded for the same period in 2020. Similarly, BetterBond’s home loan registrations for the six months ending in December last year increased by 9,85%.”
Buyers’ needs have also changed and we are seeing more people semigrating to the coast or smaller towns where they can work remotely and enjoy a better quality of life. This trend is expected to bolster buyer activity over the next few months notwithstanding the gradual rise in interest rates, he added.
House price growth appears to have flattened, with FNB expecting house prices to average between 3% and 4% in 2022. But what is encouraging is that the time properties are staying on the market – a good indicator of the state of the property sector – has shortened from eight weeks and six days to seven weeks and six days, well below the global average of 14 weeks and one day reported after the global financial crisis of 2019.
“The outcome of holding the repo rate steady for so long is that we are dealing with a very different housing market from the one that slumped into 2009 when the property boom bubble burst,” said Coetzee.
Should I be looking at a larger deposit?
If you’re thinking of purchasing a home, paying a larger deposit, if you have the financial means to do so, will help buffer future rates increases.
Being able to offer some form of deposit will always positively affect your monthly bond repayments, irrespective of the current interest rate, said Coetzee. There is more to paying off a bond than the interest rate, he said. “You can also mitigate the risk of an increase in rates by making extra bond repayments every month, thereby reducing the loan amount as quickly as possible and reducing the term of the loan too.”
“Paying a bit more into your bond now, when the interest rate is still comparatively low, will reduce your monthly repayments and serve as a buffer when interest rates increase. As an example, paying a 10% deposit on a R1 million home will reduce the monthly repayments from R8,056 to R7,250. It will also reduce the bond and transfer costs from R49,979 to R47,998.”
Read: Property law changes in 2022 that you should know about
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