24 Nov 2010

Taking Advantage Of Lower Interest Rates?

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John Vaughan (Financial Advisor) @ Lucid Living

“I’m so excited,” says Suzette, a first time home buyer. “I’ve heard that banks have cut their prime rate to 9%. It means that I can finally afford to buy a house.”

Banks are starting to ease their lending criteria and reassess their customer offerings. While we are out of a recession, demand has been subdued, so banks are being forced to stimulate demand despite a muted economic outlook.

Suzette’s excitement isn’t unfounded. According to Plexus Group chairman, Prieur du Plessis, lower lending criteria will considerably lighten households’ heavy financial burden.

But the big question is: should you be taking advantage of the favourable lending criteria and start borrowing again?

Yes, definitely, says investment expert, David Shapiro. “Interest rates are low, banks and retailers are under pressure, so it is the perfect time to pick up some great bargains.” It’s a buyers’ market; the tide is turning and both first-time buyers and investors must take full advantage of the current market conditions whilst they can.

“The lower interest rate, as a result of the recent 50 basis points cut to the repo rate, will support the housing market and benefit the affordability of housing, against the backdrop of property prices rising by more than 10% year-on-year in the first eight months of 2010” said Luthando Vutula, managing executive of ABSA Home Loans. “Mortgage repayments will now be as much as 31% lower than in late 2008” adds Vutula.

First time buyers like Suzette were hampered by various factors over the last few years. The introduction of the National Credit Act in 2007 limited the borrowing capacity of households, which made it extremely difficult to get in to the property market. And to make matters worse, the prime overdraft rate increased from 10.5% in 2006 to 15.5% during 2008. But since the first cut in December 2008, rates have receded to 9% – the lowest level since mid-1974 and each cut has made it a little easier to buy a house.

“Based on the prospects for the local economy, and especially inflation, interest rates are forecast to remain unchanged throughout 2011, with the first rate hike only expected in the first quarter of 2012” according to ABSA Capital’s Jeff Gable.

Home Loan Financing

The monthly repayment on a home loan of R500 000, over a 20-year term, at the prime rate (9%), will be R4 498. This is a saving of R2 271 per month, compared to when the interest rate was R15.5% in 2008.

Motor Vehicle Financing

The monthly repayment on a vehicle loan of R100 000, over 60 months, at the prime rate (9%), will be R2 075. This is a saving of R330 per month compared to if the interest rate was R15.5%.

According to du Plessis, “consumers should be using the savings to pay down debt.” “Pay extra on high interest bearing debt like credit and store cards,” he adds.

Investment experts still advise putting down a deposit and not getting carried away. You have to remember that interest rates will not remain low for a protracted period, warns Shapiro.

“Everyone is encouraging you to spend and borrow but don’t stretch yourself – you have to be able to afford the debt you take on and you must be comfortable if there are interest rate increases along the way.” While consumers should consider this each and every time they decide to borrow money, Shapiro adds that what makes things different this time round is employment uncertainty – ask yourself how secure your job is because that is a bigger question than if you should borrow or not.

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