EDITED BY THE EDITORIAL TEAM :: PHOTOS: SUPPLIED
The Monetary Policy Committee will soon convene, and depending on the Reserve Bank’s focus on long-term benefits rather than short-term challenges, there’s a possibility of another interest rate increase. In light of this, homeowners must proactively prepare for the potential future scenarios, regardless of whether an interest rate hike occurs.
As the Monetary Policy Committee prepares to meet on 20 July to discuss potential adjustments to the repo rate, consumers, burdened by consecutive rate hikes, eagerly await possible relief.
“Homeowners understandably feel the financial strain and seek strategies to handle their bond repayments or cut expenses. While controlling repo rate fluctuations is beyond their control, homeowners can take steps to mitigate the impact,” says Carl Coetzee, CEO of BetterBond.
Fixed or variable rates?
The choice between fixing or opting for a variable interest rate is a decision that homeowners ponder. Coetzee says there is no definitive answer when it comes to selecting the right option, as each homeowner’s financial circumstances are unique and require careful consideration of multiple factors. It is crucial to note that when initially applying for a home loan, the default basis is a variable interest rate. “Only after your bond has been registered can you apply for a fixed interest rate, and there’s a specific time limit associated with this offer before it expires.”
Fixed interest rates are typically set for a maximum duration of five years. Consequently, for a 20-year loan term, homeowners will need to renegotiate the terms, potentially leading to less favourable conditions than before. “Generally, fixed interest rates tend to be higher than variable rates, as they carry more risk for the bank. The rate is negotiated at the time of bond registration and is influenced by the prevailing rates during that specific period,” Coetzee says.
Collaborate with a bond originator for more favourable terms
Buyers should bear in mind that bond originators can approach multiple banks on their behalf to secure a lower interest rate or rate concession. BetterBond, for instance, can negotiate a superior rate concession by leveraging competition among banks based on the buyer’s risk profile, says Coetzee. Different banks assess risk in distinct ways, influencing the concessions they are willing to offer. When applying to and negotiating with four banks, BetterBond achieves an average interest rate concession of 0.61%. “Considering the current prime lending rate of 11.75%, this could potentially reduce a buyer’s interest rate to 11.14%. For a R2m home, this would lead to a monthly bond repayment decrease of R839, from R21,674 to R20,835,” Coetzee says.
“In our current economic climate, it’s natural to seek measures that provide a buffer against potential future rate hikes. However, the primary factor determining whether to fix the interest rate on your bond should always be affordability, regardless of whether interest rates are rising or not,” he says.
