Another interest rate cut makes it the ideal time to buy, rather than rent

Posted On Thursday, 23 July 2020 16:56 Published by
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With the interest rate at its lowest in decades, after the welcome announcement today of a further 25 basis points drop in the repo rate, it may now be more financially prudent to buy rather than rent a home.

Carl_Coetzee_CEO_of_BetterBond

Carl Coetzee, CEO of BetterBond, explains 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 rental 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.

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. “As this table shows, 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,” says Coetzee.

 

Monthly Bond Instalment

 

 

Bond amount

9,75%

8,75%

7,75%

7,25%

7,00%

Monthly Saving from 9,75% to 7%

Interest Saving Over 20 Years from 9,75% to 7%

R250 000,00

R2 371

R2 209

R2 052

R1 976

R1 938

R433

R103 931

R500 000,00

R4 743

R4 419

R4 105

R3 952

R3 876

R867

R207 861

R750 000,00

R7 114

R6 628

R6 157

R5 928

R5 815

R1 299

R311 792

R 1 000 000,00

R9 485

R8 837

R8 209

R7 904

R7 753

R1 732

R415 723

R 1 250 000,00

R11 856

R11 046

R10 262

R9 880

R9 691

R2 165

R519 654

R 1 500 000,00

R14 228

R13 256

R12 314

R11 856

R11 629

R2 599

R623 585

R 2 000 000,00

R18 970

R17 674

R16 419

R15 808

R15 506

R3 464

R831 446

R 3 000 000,00

R28 456

R26 511

R24 628

R23 711

R23 259

R5 197

R1 247 169

R 4 000 000,00

R37 941

R35 348

R32 838

R31 615

R31 012

R6 929

R1 662 892

R 5 000 000,00

R47 426

R44 186

R41 047

R39 519

R38 765

R8 661

R2 078 615

R 6 000 000,00

R56 911

R53 023

R49 257

R47 423

R46 518

R10 393

R2 494 338

 

“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.

Also, bear in mind that working with a bond originator will mean additional monthly savings, as well as further savings on the term of the bond. “If you apply through BetterBond, and we apply to four or more banks on your behalf, the average interest rate reduction we are getting our clients is 0.6%,” says Coetzee. A 0,6% rate reduction on a R1 million bond over 20 years would result in a saving of an additional R360 per month, and a substantial R84 500 for the duration of the bond term.

Coetzee is confident 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.”

 

Last modified on Thursday, 23 July 2020 17:02

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