Rate cuts will make loan qualification easier

The most positive effect of this week’s drop in interest rates on the residential property market will be to make home ownership more affordable for first-time homebuyers.

So says Jan Davel, the new MD of the RealNet group, who notes that with the repo rate down to 6% and the benchmark prime rate now at 9,5%, the minimum monthly repayment on a 20-year home loan of R500 000 will decrease by R164.

“This will obviously be of some help to existing homeowners, but the real benefit of the Reserve Bank’s decision this week is that it will make it easier for potential homebuyers to qualify for loans. For example, the monthly earnings required to qualify for a R500 000 loan at 9,5% will be some R15 500, compared to the R16 100 required at the previous prime rate of 10%.”

And prospective buyers, he says, will be further assisted by the fact that the rate cuts will shrink their existing monthly expenditure, which in terms of the National Credit Act must also be assessed before a loan can be granted. “Repayments on cars, furniture, clothes and credit cards will all decrease.

“What is more, with a good credit record and a deposit, some borrowers will even be able to secure loans at below prime rate, making it even more affordable for them to buy property.”

However, he says, RealNet does not expect the rate cuts to prompt a spate of new borrowing or an immediate spike in residential sales, but rather to help the property market maintain its current momentum towards full recovery.

“For one thing, there is quite a shortage of affordable, entry-level stock at this stage, because developers are bringing very few new small homes to the market and the average price of existing small homes has climbed steeply in the past year.

“And on the other hand, the middle-market upgrading that might have been boosted by the rate cuts will be quite constrained, we believe, by the effect on household budgets of higher municipal rates and service charges. Most existing homeowners will probably rather take this as an opportunity to reduce debt - but that will benefit the property market in the longer-term.”

Article by: www.realnet.co.za