While the increasing interest rates will make buying a home more financially challenging, buying at the top of an interest rate cycle could be a smart move.
Firstly, higher interest rates temper demand, so property prices may come down slightly. Secondly, you know that if you can afford the mortgage repayments at the top of an interest rate cycle, then you are less likely to face unexpected increases.
While many first-time buyers used the low interest rates during the Covid pandemic to get into the property market, these low interest rates were not sustainable and the rapid increase in rates back to pre-Covid levels has put many households under strain.
Most economists agree that we are now between 50bps to 100bps from the top of the interest rate cycle. This means interest rates should top at around 10.75% by early 2023. If you are able to afford a mortgage repayment at a rate of 10.75%, then you are less likely to experience a financial shock from future rate increases. The key is to base your affordability on a prime interest rate of 10.75%.
For example, if you took out a R1 million mortgage today paid off over 20 years, based on the current prime rate of 9.75%, your repayment would be R9 485.
To ensure you can absorb an increase to a prime rate of 10.75%, you need to factor in a monthly repayment of R10 152 (R667 more).
The best way to future-proof your budget is to start by paying in the higher amount ahead of rate increases. This way you will absorb the higher rate into your monthly budget and not face a financial shock when rates increase. You will also have the advantage of paying extra into your home loan until the rate increases.
Go mortgage shopping when buying a home
One way to make your mortgage more affordable is to shop around for better interest rates. According to bond originator Betterbond, they have found that the more banks that one applies to, the higher the potential concession on rates.
Carl Coetzee, CEO of BetterBond, says that the average concession rate when applying to four banks is 0.61% ‒ considerably less than what one would get if one only approached one bank.
Based on a R2 million bond, a 0.61% lower interest rate would save around R795 a month and a total of R190 883 over the period of the loan.
This article first appeared in City Press.