Pay your bond off sooner! An extra R100 can save you R27 000 on a R1m bond
Category General News
South Africa's prime lending rate is currently at 7%, the lowest it has been in five decades - bolstering a resilient property market. However, analysis in a recent Finder's repo rate forecast report indicates the upswing in mortgage approvals could be coming to an end.
Just on half of 25 economists on the panel (46%) voted that the trend of high volume mortgage approvals seen in 2020, is unlikely to continue into next year. A third of the panel (36%) say we'll continue to see a high volume of mortgage approvals and 18% say they're not sure.
Steven Barker, Head of Home Loans, Standard Bank says that while the bank cannot disclose the full value of home loans applied for in 2020, Standard Bank has seen a moderate increase in first time home buyers applications representing "about 53% of the applications approved within the market".
"Standard Bank's affordable housing book is at around R25.6 billion. In 2019 we registered 5 667 new affordable home loans. As the largest lender in the affordable housing sector, with a 27% market share, we have almost 99 500 customers on our books," adds Barker.
READ: SARB to hold rate but hike around the corner - expert panel
Absa Group senior economist Peter Worthington says the volume in home loan approvals seen last year can be attributed to a stock adjustment. "The problem is that incomes are not there to keep this going on a long term basis," he added.
STANLIB economist Ndivhuho Netshitenzhe agrees volumes will peter out. "[It's] most likely that people were taking full advantage of the historic low-interest rates and this trend should start to reverse as interest rates are likely to have bottomed out," she said.
Irrespective, with the interest rate currently so low, the opportunity to get into the property market is still wide open. Colin Strumpher, Sales Manager at BetterBond explains that as an originator, the company acts as an intermediary between the buyer and the bank, submitting one application to multiple banks to secure the best possible interest rate for a bond.
READ: Here's how much a deposit can save you on your home loan
"On average BetterBond achieves a 0.6% difference in interest rate between the highest and lowest offers from the banks, and in some instances much more."
This means, for example, that a client who would qualify for a prime interest rate of 7% on a R1 million bond, could receive a further reduction of 0.6% just by negotiating their bond rate, adds Strumpher.
"This amounts to a saving of almost R400 on monthly bond repayments and, over 20 years, close to R87 000."
Click here to calculate your bond affordability
For homeowners wanting to get the most from their bond, Strumpher highlights these three insider tips:
1. Some buyers consider applying for a "fixed rate", especially now that the prime lending rate is at 7%, the lowest it has been in over five decades. "While the choice is a personal one, it's worth noting that fixed rates are generally higher than the base or prime lending rate, and can only be negotiated once the bond has registered. Also, the period over which a buyer can fix the interest rate on a bond repayment is usually only one or two years," explains Strumpher.
Thereafter, the bank will revert to the variable rate which the buyer will have to renegotiate a new interest rate on their bond repayment. "Opting for a fixed rate will also negate any savings that BetterBond could secure by approaching multiple banks for a competitive interest rate, and will end up costing more in interest over the long run." A variable interest rate on a bond, however, means that the repayment on the outstanding balance on a bond will fluctuate as the prime lending rate increases or drops.
READ: SA relocation trend | Here's where buyers are investing in new homes
R1 million bond at 7% prime interest, payable over 20 years:
Minimum monthly repayment = R7 753 vs New monthly repayment (R1000 extra) = R8 753
- Total loan amount (including interest)= R1 652 262.00
- Total interest amount = R 652 262.00
- New loan duration = 189 months (15 years, 7 months)
Total savings on interest = R208 456
"The critical thing for any homeowner - if they have any additional funds, is to pay these into the bond. As an example, if you continued your bond repayment on a R1 million home at the interest rate of 10% (rather than dropping it to the current prime rate of 7%), as it was at the beginning of 2020, you would be able to reduce the bond term by about seven years," says Strumpher.
"If you are not able to pay that much, even as little as R100 extra each month on a R1 million bond will trim six months off your loan repayment period, and save you about R27 000," he adds. It is not a case of taking all your savings and putting it in your bond, but rather about being disciplined to put something extra - whatever you can afford - into your bond. "Any lump sum that you can pay in addition, do. It reduces the balance, which reduces the interest which the bank will charge."
3. Don't cancel your bond once you have paid the full amount. If you keep the bond open, it will still be possible to access funds if needed. Any amount you pay over and above your installment lies in an access facility and this can be accessed at a later stage and used as desired," says Strumpher. There is a small monthly administrative fee charged by the bank to keep it open.
Many homeowners use their primary residence to access funds so that they can buy their second property, Strumpher adds. "There is no real benefit in cancelling your bond, unless you are selling the property or you are absolutely sure that you will not be needing to access funds again. The bank will keep your account open unless instructed otherwise."
Accessing your bond and paying "cash" for your second property can save you in bond registration costs.
Author: Property24