Homeowners ignore rate cuts
Jan 19 2009 12:44
Johannesburg - Homeowners have ignored the recent rate cut and are keeping payments at old levels, ooba - formerly Mortgage SA - said on Monday.
"Thousands of homeowners are overpaying on their home loans 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," the company said.
"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," Kay Geldenhuys, manager of property financing and insurance processing at ooba said.
"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 home loans quicker."
Geldenhuys said this was a good strategy because many people had got used to paying more and wanted to keep repayments the same throughout, what was expected to be, a year of rate cuts.
The saving effects from keeping repayments the same were dramatic, she said.
For example, the monthly repayments on a 20 year, one percent below prime, R1m home loan was R12 800 a month at 14.50%.
After the rate cut of 0.5% in December 2008, the monthly repayments were 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," said Geldenhuys.
If rates dropped another two percent this year on top of the 0.5% in December, monthly repayments would fall to R11 010 a month, or R1 790 a month less, she said.
If a home-owner 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 home loan term by over seven years, Geldenhuys added.
She pointed out that as interest rates dropped this year, the benefits of sitting on cash diminished because interest earned on that money was less.
"Overseas it has become one of the most popular investment strategies right now as money in bank accounts is earning almost no interest."
Geldenhuys also said that with stock markets the world over under pressure, investors were looking for certainty.
"If your home loan rate is at 14%, putting money into the home loan means you are getting a certain return of 14% - and that's a really good return in any economic climate."
- Sapa
