To fix or not to fix your bond interest rate?

Home owners are always confronted with the option of fixing the interest rate on their bond. Unless things are really desperate, you should avoid fixing your interest rate.

The current rate of 10% is an exceptionally favorable rate and if you fix, banks will add at least 2% above prime to this. However, it's unlikely that interest rates will increase by 2% or more for at least the next 18 months to two years. Do the sums - it's an exceptionally high premium to be paying for supposed peace of mind!"

And don't get into 30 year bonds. The bulk of bond repayments are spent paying off the interest long before you get to the capital amount, so paying off earlier is always a winner. When applying for your bond, use a good originator and get quotes from the leading banks - they are competing for the same pool of qualified buyers and you can leverage this to your advantage in terms of what they are prepared to offer you.

For example:

Over 20 year term

a. R1 000 000 bond at prime (10%)
Monthly Repayment: R9 650
Total over 20 years: R2 316 000
b. R100 000 bond at prime plus 2 (12%)
Monthly Repayment: R 11 010
Total over 20 years: R2 642 400

Over 30 year term:

c. R1 000 000 at prime (10%) over 30 years
Monthly Repayment: R8 775
Total over 30 years: R3 150 000
d. R1 000 000 at prime plus 2 (12%) over 30 years
Monthly Repayment: R10 286
Total paid over 30 years: R3 702 960

Conclusion:

* Comparison of Prime vs Prime plus 2% scenarios over 20 years = additional interest of R326 400.
* Comparison of 30 year vs 20 year term at prime = additional interest of R834 000.
* Comparison of Prime vs Prime plus 2% over 30 year term = additional interest of R552 960.
* Comparison of 30 year term vs 20 year term at prime plus 2% = additional interest of R1 060 560.

The impact of compound interest over time is really scary and definitely not worth the small monthly benefit that a longer term provides. Always take any extra money and pay it into your bond, even in tough times. Rather kill off the credit card debts as soon as possible which come at a high interest premium and channel the funds from the saved instalments into your bond - it's the best investment you will ever make!

*Bruce Swain is Managing Director of Leapfrog Property Group.

Article by:Bruce Swain - www.realestateweb.co.za