Latest rate cut a possible foot in the door for first-time homebuyers

Latest rate cut a possible foot in the door for first-time homebuyers

21 May 2020

Carl Coetzee, BetterBond CEO

The fourth interest rate cut of 2020, as announced today by the South African Reserve Bank Monetary Policy Committee, is good news for consumers, but it could be even better news for those who have been renting for a long time and are looking to become homeowners. Because with rates at 50-year lows, for some the scales of their monthly budgets could be at a tipping point where it might become cheaper to buy than to rent.

Add to the equation the fact that there's no longer any transfer duty payable on property prices up to R1 million and the balance could tilt further in favour of buying versus renting.

Of course, the purchase price is only the start of your expenses when owning property and is not the only consideration when calculating whether you have the disposable income to afford buying, or not. You also need to be able to afford rates and taxes, water and electricity, regular repairs and maintenance, and more.

The general idea is that your monthly home loan repayment should be around 30% of your gross monthly income, before tax and expenses. In this regard, record-low interest rates will therefore bring certain relief in terms of easing cash flow, and could be the key for many first-time homebuyers to setting foot on the property ladder.

Let's look at the savings for home-owners, based on today's 50-basis point rate cut, from 7.75% to 7.25% as well as the previous rate cuts earlier this year, taken over the typical bond term of 20 years.

Monthly bond instalment
Bond amount 9,75% 8,75% 7,75% 7,25%
Monthly saving
(9,75% - 7,25%)
Interest saving
over 20 years
R250 000 R2 371 R2 209 R2 052 R1 976 R395 R94 884
R500 000 R4 743 R4 419 R4 105 R3 952 R791 R189 769
R750 000 R7 114 R6 628 R6 157 R5 928 R1 186 R284 653
R1 million R9 485 R8 837 R8 209 R7 904 R1 581 R379 538
R1.25 million R11 856 R11 046 R10 262 R9 880 R1 976 R474 423
R1.5 million R14 228 R13 256 R12 314 R11 856 R2 372 R569 307
R2 million R18 970 R17 674 R16 419 R15 808 R3 162 R759 076
R3 million R28 456 R26 511 R24 628 R23 711 R4 745 R1 138 614
R4 million R37 941 R35 348 R32 838 R31 615 R6 326 R1 518 153
R5 million R47 426 R44 186 R41 047 R39 519 R7 907 R1 897 690
R6 million R56 911 R53 023 R49 257 R47 423 R9 488 R2 277 229

Long-term tenants wanting to own their own homes are, of course, not the only potential beneficiaries. Investors looking to expand their portfolio by way of a property purchase could also be in the pound seats, with affordability improving across all price bands. As always, however, property must be viewed as a long-term investment - not something to be snapped up in haste, for short-term gains. Its reputation as a resilient asset class is based on a commitment over time.

In addition to the three that preceded it, this latest rate cut will aid the economic recovery of our national economy as South Africa slowly starts to emerge from the lockdown.

A functioning property sector can help to unlock income and liquidity for a whole host of role-players along the entire value chain. These include, but are not limited to, banks and bond originators, property developers, real estate agents and conveyancing attorneys. This will help stimulate economic activity and generate taxable income that could, in turn, help turn the wheels of the fiscus again.

In order to maximise the considerable contribution that this industry can make to rebuilding our economy, it is essential that estate agents, currently languishing on Level 2 of the lockdown regulations, be allowed to function as a matter of urgency, with the necessary safety precautions in place. Without them, property sales will remain sluggish and thousands of South Africans will be denied the dream of owning the roof over their own heads.

There's never been a better Time to Bond

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