The exceptionally low-interest rates are opening up the residential property market to buyers who previously did not qualify for bonds.
Following the latest interest rate cut, purchasing real estate has never been more enticing. At the current prime lending rate of just 7%, homeowners can end up spending less on their monthly bond instalments than they would in rent.
Downscale due to pressure
An applicant who previously qualified for a R1 million bond could well find that he now qualifies for one worth R1 450 000. Furthermore, the new buyer is likely to find that some homeowners are being forced to sell their homes as a result of the appalling economic situation in which South Africans now find themselves, says Rowan Alexander, Director of Alexander Swart Property where recent sales have shown a marked shift in tenants now able to become owners.
We are noticing a major swing from renting to buying as it is readily achievable under the new interest rate conditions. In January 2020 the owner of a home purchased approximately a year ago at R2.3million, would have been paying R22 000 per month on his bond (taken out at a 10% rate) for which he would have been charging R14 000 to R15 000 rent per month.
To qualify for a bond of R2.3 million, prospective buyers would have had to earn a combined salary of R60 000 to R70 000 per month.
“It is possible for a former tenant to qualify for the same bond under the new rates, with monthly earnings of only R50 000. If he has a new 30-year bond, he would come close to paying no more than he did for rent of approximately R15 500 per month. If and when the rates do begin to rise again, I suspect it maybe a year or more before it does, he will almost certainly be able to find the extra cash needed. Interest rates could even fall further in the near future," says Alexander.
Not only does this cut make it more affordable for buyers to enter the market, but it also makes it easier for existing homeowners to keep up with their monthly repayments. This is beneficial to everyone as it will hopefully reduce the number of homes that will have to be repossessed and sold at public auction, which safeguards against further downward pressure on asking prices.
If homeowners kept their bond repayments on a R1 million home loan at the same amount as they were when interest rates were at 9.75%, they will save R304,000 on interest and shorten the loan by 6.25 years at the current 7%.
For those who can afford to do so, there really has never been a better time to enter the market than right now. I would just advise buyers to leave room in their budget for if and when the interest rates return to pre-lockdown levels. For existing homeowners, if it is within their budget, I would recommend keeping the repayment as it was before the cut. This is one of the best ways to save money and, if you have an access bond, it is also a great way to have access to emergency funds if you later come to need them.