HOME owners and buyers could be tempted to fix their bond rates for a period as SA Reserve Bank governor Gill Marcus hints that low interest might not continue indefinitely while the country battles "uncomfortably high" inflation. However, options for pegging interest rates cannot be taken lightly. RealNet managing director Jan Davel says while pegged rates enable first-time buyers to budget accurately for their initial years of home ownership, the banks charge a premium to fix the rate for two to five years. The premium varies depending on the time for which the rate is fixed, but is typically two percentage points higher than the current variable rate. That means home owners should reflect carefully on what they expect interest rates to do during the time they fix their rate and calculate if they would save more in the long run. "You stand to pay a significant additional amount of interest on your home loan until the repo rate also rises at least two percentage points - and you will effectively lose that money if the rate does not rise by that much by the end of the fixed-rate term," he says. When the fixed-rate period ends, the loan also reverts to the variable rate at that time and not the rate currently applicable. Hence, long-term borrowers currently paying less than prime stand to lose a significant advantage. Davel says it's worth considering other options, such as paying as much extra into the bond as possible. While another R200 a month does not seem like a lot, the payments mount up and provide a cushion against a one or two percentage point increase in rates. The move saves thousands of rand in interest over the bond term. On a R1 million bond at an 8.5 percent rate, monthly repayments are R8 700, but paying R9 000 cuts two years off the repayment period. Another option is renegotiating the variable rate. While you may have secured the loan at prime, several years later the value of the home has risen; you have proved to be a good payer and your salary may have increased. A 0.5 percentage point reduction translates into a significant difference over the loan period. "However, the best precaution first-time buyers can take against future rate increases is buying less expensive properties and putting down large deposits," Davel says. Seeff Hillcrest and Kloof director Michele Wilson pointed out that property stock had dropped 20 percent. This, coupled with a 32 percent hike in sales, indicated a shift from purely a buyers' market. Sunday Tribune
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