Interest rates are an important consideration for anyone who owns a home or is planning to buy one – which is why the real estate industry holds its breath every time the Reserve Bank makes a rates announcement.
But prospective buyers should not give rates an undue amount of influence in their home purchasing decisions, says Gerhard Kotzé, MD of the RealNet estate agency group. “There are several other factors that are just as important to consider, including your personal family circumstances and financial position”.
“For example, although there is talk now that interest rates might start to decline again later this year, you might not have time to wait and see if this happens because your family is expanding and you need extra space right now. Or it could be that you have spent the past two years saving up a deposit and are eager just to start paying off your own place now instead of renting.”
Of course, he says, most home buyers do need at least some bank finance to buy a home, so it is necessary to understand how interest rate shifts up or down can affect your monthly home loan repayment, your total household budget and your quality of life.
“The rate at which you are paying interest on your home loan, together with the size of the loan to start with, will determine the monthly installment. And if the Reserve Bank raises interest rates, that installment is likely to go up – along with the monthly repayments on any other sort of debt you have, like car finance or a credit card balance. That could put quite a strain on your nerves as well as your personal finances”.
“In addition, interest rates often determine how much prospective buyers can borrow in the first place. If your household earnings are R25 000 a month, and you have very little other debt, you might be able to obtain a loan of R750 000 at the current base home loan interest rate of 10,5%. But if the base rate were to rise to 11%, you would only be able to borrow around R725 000.”
Nevertheless, says Kotzé, you should not let worries about future interest rate movements get in the way of your home-buying plans until you have at least also considered the following:
- Are there good rental options in the area you want to live in? Depending on the type of home you need, there may not be much choice in your preferred area. Alternatively, the overall supply of rental property may be so low, and the monthly rentals so high, that it would actually be cheaper to pay a bond installment every month instead of rent.
- You like being your own boss. You want to be able to make your own choices when it comes to paint colors, burglar bars and when you can play music or let your children play outside. For many buyers, that’s worth a great deal.
- You have a family and want to start putting down roots and having a stake in your community. You don’t want anyone to be able to disrupt that process by raising your rent, evicting you or just refusing to renew your lease.
- Could you pay cash? If you could buy a home without taking out a loan, interest rate movements would not come into the equation. Or even if you could just put down a substantial deposit, you would greatly diminish the effect of any rate changes.
- Will the property appreciate? If you are buying your first home, you are probably not going to live in it long enough to pay off a large chunk of the bond. So the only way you are going to be able to build up significant equity is if the value of the property grows. Researching whether this is likely to happen (or not) is just as important as thinking about interest rates.