Homeowners ignore rate cut; keep payments at old levels

Homeowners ignore rate cut; keep payments at old levels

Thousands of homeowners are overpaying on their homeloans in an effort to reduce their debt - and many more are expected to keep their monthly repayments up even though they have started to decline with lower interest rates.

Kay Geldenhuys, Manager of Property Financing and Insurance Processing at ooba (formerly MortgageSA), says that clearing homeloan debt is currently a popular strategy again amongst homeowners.

"Lot's of South African homeowners are worried about uncertain economic backdrop, nervous about the stock market and just having too much debt so they are dumping excess cash into their bonds.

"We've also seen that many homeowners have asked their banks to keep their monthly repayments at the levels they were before the rate cut to pay off their homeloans quicker.

"It's a good strategy because many people have got used to paying more and want to keep repayments the same throughout, what is expected to be, a year of rate cuts."

The saving effects from keeping repayments the same are dramatic.

For example, the monthly repayments on a 20 year, 1% below prime, R1m homeloan was R12 800 a month at 14.50%. After the rate cut of 0.5% in December 2008, the monthly repayments are now R12 440, a fall of R360.

"You can ask your bank to keep your repayments at the old level which means you'll be overpaying by R360 a month and saving over R300 000 in interest over the life of the loan.

"You'll also reduce your repayment period by over 2.5 years," notes Geldenhuys.

If rates drop another 2% this year on top of the 0.5% in December, monthly repayments will fall to R11 010 a month, or R1790 a month less.

If a homeowner keeps his repayments at the level of R12 800, the amount before the rate cuts started, he'll save a whopping R687 696 in interest and reduce his homeloan term by over 7 years.

Geldenhuys points out that as interest rates drop this year, the benefits of sitting on cash diminish because interest earned on that money is less.

"Overseas it has become one of the most popular investment strategies right now as money in bank accounts is earning almost no interest. While we don't expect rates to fall as dramatically as they have in say the UK or the US, we still see them falling.

"This will further underpin the case for investing in your bond as returns on cash deposits fall."

Geldenhuys also said that with stock markets the world over under pressure, investors are looking for certainty.

"If your homeloan rate is at 14%, putting money into the homeloan means you are getting a certain return of 14%. And that's a really good return in any economic climate."

Hello ooba news

The latest oobarometer stats reveal that the average purchase price growth among first-time buyers remains strong at 12.1% in June. This, together with the continued easing in lending criteria, is good news for potential homebuyers in South Africa.

With the property market beginning to show signs of a recovery, it is more important than ever to ensure your home is correctly priced. Jenny Rushin, property finance manager at ooba, SA's leading mortgage originator, said that a property listed at the right price will give sellers the greatest chance of attracting buyers.

South African banks have loosened their lending criteria which has supported a revival in the property market and helped new buyers enter the market says South Africa's leading mortgage originator, ooba.

South Africa's leading bond origination company, ooba, has seen a 55% increase in the value of approved loans from April to September this year, with a 21% surge from August to September alone.

With house price indicators like the oobarometer perking up, smart buyers are slowly returning to the market and need to be armed with how to make the best purchase possible. Ben Seymour-Brown, manager of group direct sales at ooba, said: "We expect more people to return to the property market this year and certainly next as the economy recovers, the effect of lower interest rates is felt and confidence returns to bricks and mortar investment.