The South African Reserve Bank (SARB) is expected to keep repo rate unchanged at 3.50% at the next Monetary Policy Council meeting set for, with rates at historic lows and an expected modest economic recovery. But there is good news for those who want to manage their bond effectively.
Investec Economist Kamilla Kaplan says the repo rate is already at multi-decade lows and the "decline in potential economic growth is mainly driven by structural constraints, which even lower interest rates would not alleviate".
"Moreover, higher inflation this year will see real interest rates turn negative without any rate hikes." This is inline with more forecasts that rates would be hiked later in 2021.
READ: Applying for a bond in 2021 is 'going to get tougher'
"CPI inflation is forecast to have moderated slightly to 3.1% y/y in December from 3.2% y/y in November. Deflation in the fuel price component will have had a dampening effect on headline CPI. Additionally, December is a measurement month for rentals which should continue to register slower rates of growth, reflective of the more subdued property market. This should translate to a lower contribution from the sizably weighted housing and utilities component," adds Kaplan.
Homeowners who continued 10% rate payment shaved 7 years off their bond
There’s no denying that 2020, with all its challenges, had a silver lining for first-time buyers, as tenants found it cheaper to invest in property than to rent. And with five consecutive repo rate cuts, dropping the prime lending rate from 10% in January last year to the current 7%, the average South African homeowner, who is paying off a variable rate mortgage, saved over R28 000 on bond repayments over the past 12 months, according to BetterBond data.
"It was a good year for homeowners who chose to continue repaying their bond at the prime lending rate of 10%," says Carl Coetzee, CEO of BetterBond.
Working again on BetterBond’s average purchase price in November, we see that a homeowner who continued to repay a R1.25 million bond at the 10% it was in January, saved almost R403 000 on interest and will pay off their home seven years sooner. By paying in the additional amount, the loan repayment period dropped from 20 to just over 13 years.
SEE: SA Property Demand and Supply | Over R965bn in bonds registered in 2020
The good news is that the South African Reserve Bank has forecast that the next gradual repo rate increase will only be towards the end of 2021,” says Coetzee. “So homebuyers will still benefit from these savings for the next few months.”
If one considers that the average after-tax income for bond applicants in November was just over R35 000, based on BetterBond’s data which shows that the average gross income for bond applicants was R46 000, the annual savings in bond repayments would be close to a full month’s salary. The bond repayment saving over 12 months is calculated using November’s bond applications where the average purchase price was just over R1.2 million.
The table below shows how much has been saved on monthly bond repayments, with the prime lending rate dropping from 10% in January, to the current 7% - if homeowners adjust their monthly repayments accordingly.
| Monthly Bond Instalment |
|
Bond amount |
10% |
9,75% |
8,75% |
7,75% |
7,25% |
7,00% |
|
R250 000,00 |
R2 413 |
R2 371 |
R2 209 |
R2 052 |
R1 976 |
R1 938 |
|
R500 000,00 |
R4 825 |
R4 743 |
R4 419 |
R4 105 |
R3 952 |
R3 876 |
|
R750 000,00 |
R7 238 |
R7 114 |
R6 628 |
R6 157 |
R5 928 |
R5 815 |
|
R 1 000 000,00 |
R9 650 |
R9 485 |
R8 837 |
R8 209 |
R7 904 |
R7 753 |
|
R 1 250 000,00 |
R12 063 |
R11 856 |
R11 046 |
R10 262 |
R9 880 |
R9 691 |
|
R 1 500 000,00 |
R14 475 |
R14 228 |
R13 256 |
R12 314 |
R11 856 |
R11 629 |
|
R 2 000 000,00 |
R19 300 |
R18 970 |
R17 674 |
R16 419 |
R15 808 |
R15 506 |
|
R 3 000 000,00 |
R28 951 |
R28 456 |
R26 511 |
R24 628 |
R23 711 |
R23 259 |
|
R 4 000 000,00 |
R38 601 |
R37 941 |
R35 348 |
R32 838 |
R31 615 |
R31 012 |
|
R 5 000 000,00 |
R48 251 |
R47 426 |
R44 186 |
R41 047 |
R39 519 |
R38 765 |
|
R 6 000 000,00 |
R57 901 |
R56 911 |
R53 023 |
R49 257 |
R47 423 |
R46 518 |
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| Possible savings with 10% interest payments made |
|
Monthly Saving from 10% to 7% |
Saving over 12 months |
Interest Saving Over 20 Years from 10% to 7% |
|
R475 |
R5 700 |
R113 834 |
|
R949 |
R11 388 |
R227 667 |
|
R1 423 |
R17 076 |
R341 501 |
|
R1 897 |
R22 764 |
R455 335 |
|
R2 372 |
R28 464 |
R569 168 |
|
R2 846 |
R34 152 |
R683 002 |
|
R3 794 |
R45 528 |
R910 669 |
|
R5 692 |
R68 304 |
R1 366 004 |
|
R7 589 |
R91 068 |
R1 821 338 |
|
R9 486 |
R113 832 |
R2 276 673 |
|
R11 383 |
R136 596 |
R2 732 007 |
“Much has been said about the impact of the record-low interest rates, as well as the favourable lending environment, on the recovery of the property market. But it is only when one looks at how this translates into actual savings for the average consumer, whether they choose to adjust their bond to make the most of the immediate relief the lower interest rate offers or, they opt to pay more to reduce their loan repayment period, that one realises the significance of the SARB’s aggressive repo rate cuts last year,” says Coetzee.
Monetary Committee Meetings dates for 2021:
- 19 – 21 January
- 23 – 25 March
- 18 – 20 May
- 20– 22 July
- 21– 23 September
- 16 – 18 November
The next statement of the Monetary Policy Committee will be released on 21 January 2021.
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