Advice and Opinion

Is this the right time to fix your bond interest rate repayments?

With some residential property bond holders now concerned that the interest rates will rise further in the not too distant future, he is occasionally asked whether this might be right time to fix interest rates, says Mike van Alphen, National Manager for the Rawson Property Group’s bond origination division, Rawson Finance.

“In today’s circumstances,” said van Alphen, “it is quite understandable that people are looking for ways to protect themselves from all price rises. However, it has to be admitted that this can be an expensive procedure and therefore not necessarily advisable.”

South African banks, said van Alphen, very seldom quote blanket figures for fixed interest rates – they generally wait until the loan has been approved and then treat each case individually.

“What can be said is that most fixed rates are set 1% to 3% above the current rate and this results in the client paying more than is essential at that time.”

Giving as an example, van Alphen said that on a R800,000 bond taken out over a 20 year period at the current rate of 9,00%, the borrower would pay R7,200 per month. If he then chose to fix the rate for, say, three years, he would probably have been asked to pay 2,00 % above the current rate, which equates to R8,256 per month.

Asked if it might pay, in view of the fluctuations experienced in previous years, to go for a fixed rate over a far longer period, van Alphen said that the banks very seldom grant fixed rates for more than five years and in the current conditions they might charge as much as R1,600 extra on a R800,000, five year fixed rate loan.

“That is a fairly steep price to pay for the knowledge that you know exactly how much to budget for,” he said.

The advice always given by the Rawson Property Group’s Managing Director, Tony Clarke, as well as by himself, said van Alphen, is to strive, even if it involves considerable hardship, to set the rate of payment above the rate stipulated by, say, 1% or 2%.

“Those who go this route will have the huge satisfaction of seeing their bond repayment period significantly cut and of knowing that, should they experience hard times, they have a cash buffer which allows them to skip one or two months of payments without suffering any penalties.”

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