High Bond Costs Got You Down? Here's How to Navigate the Rising Interest Rate
The rising interest rate has affected many South Africans all over the country. With the latest announcement of the increased repo rate, homeowners are really feeling the pinch of the rise in their bond repayments.
At the end of 2021, the monthly instalments on a R1 million bond were around R7 500 over 25 years. Today the monthly instalments of a house of similar value will be almost R10 000. With a jump that big it is no wonder that homeowners are unable to afford their properties. And the last thing you want to do is pack up and sell your home.
So how exactly do you navigate the rising interest rate? Here are a few tips.
1) Beat the rising interest rate by settling your bond earlier
One way of avoiding the punch of a huge interest rate hike is to pay off your bond earlier. By simply paying a few hundred rands into your mortgage account each month, you drastically reduce its duration.
Let's say, for example, you own the R1 million house mentioned above. If you only pay R500 extra into the bond account, you will decrease the duration of the bond by almost three years. And, of course, if you can afford to pay more, the faster your loan will be paid off.
2) Let the rising interest rate work for you: invest in your home
If you decide to push extra money into your home loan account, you are essentially treating your home as an investment. This is the best way to let the rising interest rate work for you. Not only will your house increase in value, but you are also investing money at a higher rate of return.
Additionally, investing in your home is tax-free. This is something that very few financial institutions can promise.
3) Try to save up for a big deposit
This is the go-to advice that any estate agent will give you. The bigger your deposit, the less capital the bank has to give you. And the smaller your bond amount, the less interest you have to pay! So even if there is a sudden increase in the interest rate, you'll be able to navigate it better.
A bigger deposit also looks amazing to financial institutions and banks. The result is that they might offer you an excellent interest rate when you apply for a home loan. The lower you can get that initial interest rate offer, the better.
4) Consider a fixed interest rate as an option when you buy
Some financial institutions offer the option of taking a fixed interest rate for a limited time. This gives you time to budget and save so that you can better navigate rising interest rates after this period is over.
Fixed interest rates can be beneficial because it gives you financial breathing space. However, some banks use it as an opportunity to give you a higher interest rate when you apply for a bond. It might still be the better option if you are apprehensive about rising interest rates.
5) Aim for a bond-free retirement
The best thing you can do for your senior self is to retire bond-free. Once you retire there is a drastic change in your monthly budget. You won't be receiving the same salary and you'll definitely have to adjust your lifestyle.
It can put a lot of pressure on a homeowner to still pay back a mortgage whilst trying to enjoy retirement. You might even find that all the money you have will be pushed into the bond. And if all your money goes into a bond, where will you find the time to enjoy those long-awaited holidays you've worked so hard for?
Final thoughts
The chances that you encounter rising interest rates in the course of your homeownership are big. There is, unfortunately, no way to control the repo rate or the economic market. However, with these few tips, you can easily navigate your way through it. You don't have to sell your house if you work smart with your money.