AA - 2020

Author: Staff Writer
23 July 2020

Here’s how much money you will save on a R1 million bond with rates at historic lows

With the interest rate at its lowest in decades, it may now be more financially prudent to buy rather than rent a home, says Carl Coetzee, chief executive officer of BetterBond.

This comes after the South African Reserve Bank’s Monetary Policy Committee voted to cut the country’s rates by a further 25 basis points on Thursday (23 July).

Coetzee said that with the repo rate at a record low of 3.5%, potential homeowners could be paying less in bond repayments than monthly rent, and they could also save a substantial amount over the long-term.

“With the prime lending rate now down to 7% from 7.25%, the monthly saving on the bond payment for a R1 million home will be around R150.

“If one considers that the average monthly rent in the formal market is about R7,800, the monthly bond repayment for a R1 million property, at prime lending rate of 7%, would be less at around R7,750,” he said.

Coetzee added that the five repo rate cuts this year has seen the prime lending rate drop from 10% in January to the current low of 7%, resulting in a significant reduction in monthly bond instalments over the past several months.

“The difference from 9.75% – the first-rate at the beginning of the year – to 7% on a R1 million home means a monthly saving of around R1,700 on the monthly payment, and a staggering R416,000 over the 20-year bond term,” he said.

“Furthermore, the total savings on a R1 million bond – if one continues the monthly bond repayment amount at the rate from earlier in the year, i.e. when the repo rate was higher at 9.75% – with an interest rate now of 7%, is R304,000.

“So by paying more into the bond in this way, it’s possible to shorten the loan period by 6.25 years.”

While there are additional costs associated with owning a home, the benefits of investing in a tangible asset that also offers a long-term savings option, are considerable, Coetzee said.

He said that this latest cut will accelerate the recovery of the property market, which was already showing signs of sluggish growth before the pandemic.

“Already bond applications for July, according to the latest figures released today, are up 52% year-on-year, and we expect to see more activity, especially from first-home buyers, as they take advantage of the lowest interest rate in decades.”

Buyer’s market

The rate cut has been largely welcomed by the real estate agency, with most commenters saying that now is a good time to get into the market if you can afford to.

“With interest rates at historic lows and property price growth barely keeping up with inflation over the last few years, the current market is one to seriously consider if you are a buyer who has a secure monthly income and has a long-term view of where you want to live or invest,” said Herschel Jawitz, chief executive officer of Jawitz Properties.

“The cumulative effect of the interest rate cuts has reduced monthly payments by almost 20% from where it was in March this year.”

This sentiment was echoed by Dr Andrew Golding, chief executive of the Pam Golding Property group.

“From an overall residential housing market and Pam Golding Properties perspective, we’ve seen the meaningful reduction in the repo rate for the year to date having a positive impact on demand – particularly in the lower price band below R2 million, where we are experiencing a high uptake among first-time and other buyers and investors,” he said.

“We are also successfully concluding sales in the middle to upper price bands, especially from R2 million to approximately R5 million.”

However, Samuel Seeff, chairman of the Seeff Property Group, said that the central bank should be taking a more aggressive stance with deeper cuts to boost the economy and property market during this unprecedented economic recession.

“People are not spending and the economy is simply not moving. More needs to be done to give momentum to the economy and property market, he says further,” he said.

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