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THE INTEREST RATE AND PROPERTY

The interest rates have remained at a 30-year low since November 2010
and are likely to stay there a while longer, says Adrian Goslett, CEO of RE/MAX
of Southern Africa.



Why is this important for the South African property market and
homeowners? “Majority of South African homeowners and buyers are loan dependent
and require financial assistance to purchase property. This means that the
interest rates will influence most consumers at some stage of their lives in
some way,” says Goslett.



He notes that the interest rates have a massive affect on the property
market and particularly consumers who are already homeowners. If a homeowner
has chosen to fix their interest rate amount then they will be much less
affected by the fluctuations of the rates over the term of their loan. However,
homeowners who haven’t fixed their rate will have reduced monthly repayments
the lower the interest rate and increased repayments if it goes up. “A low
interest rate could give a homeowner the ability to pay extra money into their
bond, reduce the term of the loan and pay it off faster, without affecting
their monthly budget too severely,” says Goslett.



During the boom period banks were offering a repayment percentage on
residential property of prime less two. This is no longer the case and most
financial institutions are offering a rate of prime. “However, “says Goslett,
“this still translates to a reduced repayment on new loan agreements because since
the boom period the prime interest rate has been reduced by 5.5%.  In
fact, in today’s property market the overall monthly bond repayments are a
great deal cheaper. This, coupled with where property pricing is at the moment,
makes it an ideal time to buy property.”



Aside from the possible fluctuations on repayments for homeowners, the
interest rate directly affects buyers wanting to purchase property and how much
they can afford. Since the introduction of the National Credit Act, banks have
put a lot of emphasis on affordability levels and a low rate assists buyers to
show higher affordability levels.



“The interest rate will impact the size of the bond which a buyer will
be approved for. If the rate is lower, it is likely that the buyer will be able
to afford a larger bond, provided all other aspects are in place,” says
Goslett. “Paying interest at a lower rate will indirectly put more disposable
money in the buyer’s pocket and drive demand in the property market. More and
more buyers with a clean credit record are finding it easier to raise finance
and purchase property .The increased demand will push property pricing up at
some stage and increase the home’s value over time.”



From an investment perspective the increased demand
in property as well as the reduced monthly repayment will result in investors
gaining more from their property portfolios. Property investors who have a
rental portfolio, for example, will be able to charge the same rental for their
units, while paying reduced bond repayments resulting in greater profit. The
less interest that is paid on an investment property each year means the less
net return that will need to be realised for the owner to see a return on their
initial investment. 



“Consumers who are interested in making the most of the current interest
rates and want to invest in the property market should approach a bank or a
reputable mortgage originator such as Betterbond, to ascertain exactly how much
they can spend. Some may be surprised at the opportunity the interest rate has
created in the market,” concludes Goslett.






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