Cushioning against higher interest rates

The continued volatility of the financial markets and oil prices – a new high of over US$77/bl was set in July – coupled with the rand hovering above R7/$ for most of July and negative news flow surrounding the Middle East is expected by Absa to coalesce into encouraging the Monetary Policy Committee (MPC) to increase the repo rate from 7,5 percent to eight percent at its next meeting on August 3.

The rate was increased by 50 percentage points at the MPC’s last meeting on June 8 to 7,5 percent.

Absa’s forecast follows last week’s announcement of June’s CPIX inflation rise in line with consensus expectations to 4,8% year-on-year compared with 4,1% in May.
Headline inflation, pushed higher by June’s interest rate hike, jumped to 4,9% year-on-year from May’s 3,9%.

The latest increase brings the CPIX to its highest level since August 2005 and headline inflation to its highest level since the third quarter of 2003.
With the oil price on course for new highs and inflation under pressure from burgeoning transport and food costs, Bill Rawson, national president of the Institute of Estate Agents and chairman of Rawson Properties, says homeowners already struggling to make ends meet could be faced with some serious decisions.
“Many people, especially those buying for the first or second time, simply do not anticipate that interest rates can rise – as they are bound to do at some stage. Then they suffer because they have over-stretched themselves.”

The most obvious solution for buyers currently applying for loans with banks, as well as current property owners, says Rawson, is to ask the bank for a fixed interest rate option for the next two years so as to avoid the possibility of large interest rate fluctuations. Estate agents, he says, should discuss this possibility with their clients.

Rawson suggests four “rescue options” for those already involved in paying a bond but likely to find a higher rate difficult. The first, to ask the bank to revalue the property and then refinance the home around its current market value.
As values have risen for more than three years Rawson it is virtually certain that most properties will have appreciated by at least 20%. “This means that you can apply for an increased bond, draw a lump sum on it and use this extra cash to top up your bond, thereby keeping your monthly payments at their original level or close to it. A homeowner with a R1 million bond would after a revaluation probably find that he could draw R160 000 to put into his bond, which would give some “breathing space” for up to two years.”

Another suggestion is that of selling a fraction of the home, say 20%, and to use this money to top up the bond thereby maintaining payments at their original levels.
“This solution,” said Rawson, “is best resorted to through a trustworthy friend or a family member, such as one’s parents. Even then it is important that the documentation should be 100% clear and intact.”

He also sees merit in renting out the home and moving into rented property with a lower monthly repayment. This is one of the more traditional methods of coping with higher interest rates with the owner regaining occupation when the situation improves. Another possible option is to take in a tenant. The additional monthly income would help cope with the increased monthly repayments.

“In extreme circumstances,” says Rawson, “the need can arise to “ring fence” your debts. It can be wise sometimes to sell below your bond value, pay back as much as you can and then negotiate with the bank to pay the remainder on a personal loan basis.”

While the current general consensus is that rates are only likely to rise by a maximum of another two or possibly three increases of 50 percentage points each this year before stabilising early next year Rawson is confident that the Reserve Bank will act responsibly in keeping increases to a minimum. But even then he acknowledges that an eventual two percent rise could be painful to many homeowners.

“What must be realised is that a 2% interest rate rise results in a ± 20% increase in the monthly bond payments. This can be crippling for a salaried man or woman with no obvious means of increasing his or her earnings quickly.
Rhys Dyer, executive director of MortgageSA, also holds strong views on how considerable savings can be made by following simple rules and avoiding common mistakes with household expenses.

Key among them is under-insuring a home and its contents. “If you’ve made any improvements since taking out your home insurance, it will have changed the value of your home. Significant changes to your house will increase the value it should be insured for, so it’s important to keep you insurer up to date with any changes.

And don’t forget your contents insurance. Unfortunately, Dyer says, most people underestimate how much their belongings are worth. “If you purchase new furniture or electronics, then you should review your contents policy to make sure you have adequate cover.”

Also, an increasingly common and costly factor is that of using sub-standard contractors. Botched home improvements cost consumers millions every year and can actually reduce the value of a home, or worse, cause expensive damage. And unfortunately, finding a builder or a tradesperson and managing a building or renovation project are probably the most stress-inducing aspects of any homeowner.

Dyer advises a thorough background check on anyone who is going to take a hammer to your home.

The widespread trend of improvements to property by their owners during the recent boom, he says, should now be approached with greater deliberation. “

“Not every improvement will add value to your home. New carpets could cost R50 000 but add very little value to its overall worth. However, the right paint job can add up to 10% to your home’s value.

“Your first home improvement priority should be to ensure the property is structurally sound. Roofing, windows, damp proofing and the electrics should all be in top condition and, if they’re not, should be at the top of your home improvements list.

He also advises against “tokenism” being applied in securing a home. Basic steps are essential. “ It’s all very good and well to have a home contents insurance policy, but if you don’t take the appropriate measures to secure your property, you may find yourself seriously out of pocket if you are burgled.

If your home fails to meet your insurer’s security requirements, then your policy will become void, even if you’ve paid premiums for years. Don’t waste your insurance premiums or, worse, face having to pay to replace stolen possessions. Read your contents policy carefully and make sure your home meets its minimum-security requirements.

Discounts are offered on some policies - sometimes up to 10% - by fitting burglar alarms or locks above the minimum required standard. Joining a neighbourhood watch scheme can also reduce your insurance premium.
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