The South African Reserve Bank left the repo rate, the rate at which the central bank loans money to banks, at 3.5% at its latest meeting, in July. This is the lowest in over 50 years and is the result of consistent cuts from July 2019, resulting in a cumulative 300 basis points.
While low interest rates are not always good news (just ask those trying to save), it definitely supports a buyers’ market for prospective homeowners.
For a lot of people, the interest rate cuts signalled an opportunity to move from the rental market into property ownership despite the economic turbulence brought on by a global pandemic, says Nondumiso Ncapai, Head of Product at Absa Home Loans.
“People started to see the difference in monthly rental payments and probable bond repayments shrink,” she says. “We saw an increase in applications coming through after the initial lockdowns were eased in 2020.”
Increase in affordability
By way of example, Ncapai points out that the monthly repayments on a R1 million bond taken over a 20-year period at a rate of prime, would now be close to R2 000 less per month than before the 300-basis point rate cut.
For those individuals who have been able to weather the pandemic storm and retain their source of monthly income, this is certainly enticing.
“What happened in the market was actually quite interesting,” she says. “It recovered in a way that we had not anticipated.”
Ncapai’s division at Absa is responsible for designing products and financial solutions that suit customers’ needs, also driving new digital solutions that enable the bank’s customers to engage with the Home Loan team as effortlessly as possible. An example is the online channel which now enables customers to apply for a home loan in under 15 minutes, making the process easy and simple even for first time buyers. Customers also get a free uninterrupted power supply (UPS) device delivered to their new home when registering the home loan with Absa.
Advice for prospective property owners
For those buyers out there still looking to join the homeowners’ club, she shares some advice.
“A bank will always look at your affordability when assessing your need for lending. Therefore it is really important to ensure that you are making the right decision for yourself and your situation,” she says.
“You have to look at your budget and what you can repay – it boils down to buying within your means.”
She urges prospective homeowners to plan ahead and save to pay a deposit towards their home. If you want to have some negotiation clout in terms of the interest rate, having a deposit goes a long way.
“The deposit will also help you to save on interest over time, and it shortens the period of the loan. You can look at 10% of what you are asking the bank [for],” she says.
It is important, also, to remember all the other costs associated with buying a property.
“There are bond registration costs, transfer costs including transfer duties. There is [also the] cost a lot of people forget about – moving cost. Then you also have rates, levies, insurance and maintenance,” says Ncapai.
The choice between whether to keep your bond at a variable prime rate or to fix your repayment rate for a period (always at a specific cost as the bank needs to charge for the risk it takes on) is a personal one.
“You, as a consumer, will have to decide whether it is what you want at that point in time,” says Ncapai. “What is important to remember is that, at any point in time, should you decide to end the fixed rate contract sooner than what was agreed with the bank, there will be a fee that you would have to pay. So, it is important to understand where the market is going, but also what you want out of it, as a consumer.”
Get your house in order before applying
Ncapai believes that it is beneficial for prospective homeowners to know what the bank will look at when evaluating them for a bond. If the customers know what will be under the spotlight, they can prepare accordingly.
“Start to look at and understand your income and expenses. The bank will also look at your credit exposure – try to limit the latter,” she says.
“Use your free annual credit record check to understand your own credit status and adjust where necessary.”
“You can control your expenses and plan towards a deposit for that day when you do approach the bank for a loan,” she says.
Brought to you by Absa Retail and Business Banking.
Moneyweb does not endorse any product or service being advertised in sponsored articles on our platform.