Great alternatives to fixed rates

With interest rates at historic lows, many homeowners are contemplating whether or not to fix their bond rates.

While economists – and homeowners – widely expect interest rates to start rising early next year if not later this year, pegging bond rates to a fixed level is not necessarily the smartest option right now, says Martin Schultheiss, CEO of property group Harcourts Africa.

“Banks usually offer fixed rates at one or two percentage points above prevailing levels, which means that homeowners who exercise this option will be paying a higher rate until interest rates catch up. And if rates do not rise quickly, homeowners paying a fixed rate will be out of pocket,” he cautions.

At the current rate of 10% the monthly payment on a R750 000 bond over 20 years, for instance, would in the region of R7250 but by fixing the rate at, say, 12%, the required payment would jump to about R8250, Schultheiss explains.

“That’s an extra R1000 per month while rates stay at 10% - and in the unlikely but not impossible event that rates decline further, homeowners with a fixed rate stand to lose even more.

“A much more profitable option would be to use the extra R1000 in the example above to reduce the capital on the bond by voluntarily paying it into the bond account each month. Not only would that reduce the term of the bond and total interest payments, but it would create a tidy buffer over time that would act as protection against sudden hikes in rates or other unforeseen circumstances such as financial hardship. And above all, it remains flexible and in the sole control of the homeowner.”

Schultheiss adds that it is good policy in any event to pay an additional amount into the bond account every month. “For instance, in our example above the homeowner would pay off his bond in about 14 years and save a whopping R325 000 in interest if rates remained at 10% and he paid an additional R1000 into his account each month.

“Of course rates will fluctuate, but homeowners will win handsomely in the end by adjusting voluntary additional payments accordingly, if at all possible,” he says.

New buyers can also protect themselves against rate increases, says Schultheiss, by limiting their exposure. “There are two ways to do this. Buyers can either pay bigger deposits to limit the bond amount, or buy more modest property at a lower price and use the ‘savings’ to pay off the bond faster and benefit from the reduced interest payments.”

Article by: www.harcourts.co.za