Steady rates should motivate home buyers to save bigger deposits

The Reserve Bank has elected to keep interest rates unchanged for at least the next two months, despite the slight drop in the inflation rate to 4,4% at the end of April from 4,5% at the end of March.

This means that the repo rate will remain at 6,75% and the prime rate / base home loan rate 10,25%. There will also be no change in the minimum monthly repayments on all forms of credit, from home loans and car finance to credit and store card balances and personal loans.

The Bank's decision has disappointed many commentators who believe that a decrease in rates - even a symbolic one of a few percentage points - is needed now to kickstart the economy by encouraging consumers and investors to spend more.

However, Reserve Bank Governor Letseja Kganyago says the Monetary Policy Committee remains concerned about possible upwards pressure on inflation later this year as a result of electricity tariff hikes and unstable international oil prices that could necessitate further fuel price increases in SA.

Eskom electricity tariffs will increase by an effective 14% by the end of the year and most local authorities are already starting to pass these increases along to consumers. The City of Johannesburg, for example, has this week announced that its electricity charges will be going up by 13% as of 1 June.

Water tariffs are also rising and many households are already feeling the pinch with petrol prices being at their highest level in six months following a substantial hike earlier this month.

"So an interest rate decrease would definitely have benefited consumers, but we understand that the Reserve Bank also has to weigh up future risk - and consider the need to attract foreign investment into SA with comparatively high rates in international terms," says Rudi Botha, CEO of BetterBond, which is SA's leading bond originator*.

"What is more, consumer confidence has already risen strongly on the back of a successful Election earlier this month so we would rather urge consumers to keep paying down their debts as fast as possible, and to boost their savings as much as they can, especially if they are planning to buy a home.

"Buyers always need cash to cover bond registration costs and legal and transfer fees, and there are really significant advantages for home loan applicants who are also able to pay a cash deposit."

For example, he says, paying a 20% deposit on a home costing R1,5m will lower your loan requirement to R1,2m, and at an interest rate of 10,25% will drop your monthly bond repayment from just over R14 700 to around R11 800. This will save you almost R35 000 a year.

What is more, paying the deposit will make it easier to qualify for a home loan - and more likely that you will be able to negotiate an interest rate concession that generates even bigger savings on the total cost of your home.

"Currently, the average variation between the best and worst interest rates offered on the bond applications we submit to the banks is 0,5%, and on a 20-year bond of R1,5m, that translates into potential savings of more than R120 000 over the lifetime of the bond - in addition to those monthly bond instalment savings."

To see what sort of savings can be achieved by paying a deposit and gain inspiration to save more, prospective buyers can use the BetterBond repayment calculator at www.betterbond.co.za/calculators/home-loan-repayment

*BetterBond is SA's leading bond originator and currently accounts for more than 27% of all new mortgage bonds registered in the Deeds Office annually.

"In other words, making use of our services could make all the difference between being able to buy where you really want to live or having to move somewhere else."