Residential Bonds vs rental repayments: what's the gap?

Expect at least a 30% shortfall in repayments if you are buying to let - originator

The developer, not you, will make money if you take a mortgage of 80 to 100% on a second property right now, Betterbond's sales director Marsha Haupt has warned.

Haupt said renting has become more attractive along with rising interest rates

"Potential home buyers are renting, placing their home-buying decisions on hold due to the diminished affordability of property. They want to observe what is happening with interest rates before they consider purchasing property. Therefore, the demand for rental properties has escalated dramatically," she said on Thursday.

Haupt noted that the first edition of the FNB Residential Property Barometer for the rental market in the first quarter of 2008 shows a positive picture of the rental market when compared with the main FNB Residential Property Barometer for the home buying market.

"The FNB barometer also shows that on a scale of one to ten, the activity in the home buyers market is at a mediocre level of around 4,96, whereas the rental market's activity is above average at 8,4."

Haupt referred to comments by FNB Home Loans property strategist, John Loos, that monthly rental repayments are considerably lower than 100% bond repayments, which make the rental option increasingly popular during these times of rising interest rates.

Investors are now "dipping their toes" back into the buy to let market. This is resulting in the recovery of the rental market.

"The gap between rental and bond repayment rates in metro areas is approximately 65% of bond repayments," said Haupt.

"Therefore on a bond of R500 000, the repayment would be R6 585 whereas rental would be R4 300". In non-metro/coastal areas the gap is about 60%, with reference to the same example, the rent would be R3 900, she said.

Haupt warned that developers are attracting investors with a buy-to-let promise.

"They assure investors of rental returns, however it will not materialise if the investor is taking an 80% - 100% bond. This approach will make the developer rich but will most definitely place the inexperienced investor in financial hardship as the rental will not cover the bond repayment," she said.

"In spite of the high interest rates, the slowing price growth is an opportunity for investors with money to buy. Properties are reaching more reasonable price levels and at some point interest rates will inevitably start to fall and prices will once again start to climb, providing good returns for investors," Haupt added.

Article from: www.sapropertyinvestor.co.za