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Monday Jan 13, 2014

Alternatives to a fixed rate mortgage bond

With the rate of inflation still 'uncomfortably high', according to reserve Bank Governor Gill Marcus, many property owners and buyers are starting to worry that the current low interest rates can't last, and wondering whether the time has come to fix their home loan rate.

'This is sometimes a good idea for people living on a fixed income or first-time buyers who want to be able to budget accurately for the first few years of home ownership,' says Jan Davel, managing director of the RealNet estate agency group.

'But anyone considering this option must bear in mind that the banks will charge a premium to fix their rate, usually for between two and five years. This premium will vary depending on the length of time for which you want to fix your rate, but will probably be at least two percentage points higher than the variable rate you are paying now.

'This means that you stand to pay a significant additional amount of interest on your home loan until the repo rate also rises at least two percentage points - and that you will effectively lose that money if the repo rate does not rise that much by the end of your fixed-rate term.'

In addition, he says that when the fixed-rate period ends, your loan will revert to whatever the new variable rate is at the time, not to the variable rate you are paying now. And if you are a longstanding borrower currently paying less than prime, that could be a big advantage to lose.

Consequently, Davel says, it is seriously worth considering other options, the first of which is simply to pay as much additional money into your bond account as you can each month.

'You might not think that R200 or R300 a month extra is going to make much difference, but it mounts up and will quickly give you a cushion against a one or two percentage point increase in interest rates.

'In addition, it will actually save you many thousands of rands worth of interest over the term of your loan. If you have a R1 million bond at the current prime rate of 8.5 percent, for example, your monthly home loan repayment will be around R8 700, but if you can manage to pay R9 000 instead, you will cut two years off your loan repayment period and save yourself more than R104 000 in interest.'

Alternatively, he says, those who have had their loan for a few years can approach their bank to see if they can negotiate a reduction in their variable rate.

'If you were granted your loan at prime, for example, your current interest rate will be 8.5 percent. But if you've been a good payer and your salary and the value of your home have risen since you took out the loan, your bank might be willing to lower the rate - and even a 0.5 percentage point reduction can make a big difference.

'On a R1m loan, it would lower the minimum monthly repayment by about R300 - which you could use, as above, to reduce the capital portion of the loan and provide yourself with a cushion against possible interest rate increases.'

As for first- time buyers, Davel says the best precautions they can take against future rate increases is to buy less expensive properties and to put down the biggest deposits they can manage.

Weekend Argus (Saturday Edition)


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