It's time to place your bet on mortgage rates
The falling trend in mortgage rates may soon come to an end, making a fixed-rate bond an option, writes LUCIENNE FILD
THE mortgage bond rate is at its lowest level in 12 years. But skittish homeowners, all to used to skyhigh repayments, could be wondering when the fairytale will end.
Sadly, it may be sooner than we'd like.
Economists predict that interest rates are about to reach the bottom of their downward cycle. Only one more cut is expected for the year, and then rates could start an uphill climb.
This leaves homeowners and new buyers with a tough decision: should they lock into a fixed-rate mortgage bond option now, or ride the variable rate a little longer in the hope that rates will drop further?
Home-owners traditionally take a variable-rate mortgage bond, but it's the riskier option, as people found out when the rate shot up to 24% in 1998.
After the cut in interest rates earlier this month, you can now pick up a 14.5% variable-rate bond. And if you are a preferred customer you can get a percentage point or two below this.
Even cheaper variablerate bonds are available from companies that offer securitised loans. SA Home Loans (SAHL) and FNB's SmartBond option offer rates that are linked to the three-month banker's acceptance (BA) rate, rather than the prime rate. (The BA rate is the benchmark short-term interest rate.) Today, SAHL offers a rate of 12.3% and SmartBond's rate is 12.24%.
These loans aren't suitable for all home-owners, however. FNB will only offer a SmartBond loan for up to 70% of a property's value, leaving the homeowner to finance the balance, and the minimum bond size, at R200 000, is high. SAHL doesn't restrict the loan size provided you can fork out a 30% deposit.
If you go for this type of securitised bond, bear in mind that the BA rate is usually the first to rise when there is upward pressure.
NBS recently brought a new breed of home loan to the market. The Superate bond is currently at 13.3%, which is reviewed quarterly (similarly to SAHL and Smartbond), and is based on various market rates. With this option you need a 30% deposit and the minimum loan size is R200 000.
You can alternatively take a fixed-rate mortgage bond if it fits in with your view of future interest rates and if you need to know the size of your monthly bond repayments.
The Nedcor banks (Nedbank, Permanent Bank and Peoples Bank) offer a fixed rate home loan of 14.65% for 12 months on, say, a R300 000 bond. The 12month term is the only fixed option available.
FNB will allow you to fix your rate at 14.4% for a maximum of 12 months, regardless of the bond size. And unlike the other banks, FNB does not discriminate between new and existing bondholders.
Absa offers new clients an attractive fixed rate of 13.4% for 12 months and 14.6% for 24 months on a R300 000 bond. Existing bondholders can get 13.9% fixed for 12 months, or 15.10% fixed for 24 months on a R300 000 bond.
NBS will give new bondholders a fixed rate of 13.7% for 12 months, 15% for 18 months, and 15.25% for 24 months on a R300 000 bond. Existing clients can have a fixed rate, but at an extra 0.5%.
Standard Bank offers existing clients and bondholders switching from other institutions a fixed rate of 14% over 12 months, 14.5% over 18 months and 14.75% over 24 months on a bond of R300 000.
New bond-holders are eligible for a rate of 13.5% over 12 months, 14% over 18 months, and 14.25% over 24 months on a R300 000 loan.
Note that the banks, with the exception of FNB, apply slightly higher fixed rates to smaller bonds, while loans above R400 000 get better rates.
Most banks are no longer promoting their step-down or shrinkingrate bonds. This option is not considered viable as long as interest rates are in a downward cycle.
Wondering what to do?
Here's what the experts advise:
Professor Iraj Abedian, Standard Bank's chief economist, says the pattern of interest rates all depends on Finance Minister Trevor Manuel's Budget next month.
If the Budget requires the tightening of monetary policy to control inflation, rates are likely to remain stagnant. If not, expect another cut of 0.5% to 1% during the year.
Abedian says fixing your rate for 12 months is not the best strategy - you could lose if rates come down further. "The variable rate is safe over the short-term - provided there are no international economic disasters."
But since rates could rise next year, Abedian advises that fixing your rate for 18 or 24 months next year is not a bad idea.
Professor Karl Posel, mathematician and author of two books on mortgage bonds, says further cuts are likely, but the mortgage rate should stabilise at 14.5% in a year. Meanwhile, another 1.5% cut is not out of the question.
"I would go with the variable rate," is his advice.
Dave Mohr, Citadel chief economist, says there's still a moderate downside to interest rates, but no more than 0.5% to 1%. He expects a rate cut around the middle of the year. After that, rates should move sideways until next year. "At some point there'll be an increase, but it should be a short, moderate up-cycle," he says.
Mohr says the bottom of a cycle is the best time to fix rates. If you go for a fixed rate look at a competitive rate over two years.
Marilyn Gates, an economist with Trematon Global Investment Services, expects the rate to bottom at 14% in April.
She says that by the end of the year the economy should start heating up and interest rates could gradually rise.
All rates quoted assume a bond value of 80% or less of the property value; bond values exceeding this ratio are penalised with slightly higher rates.