Experts give the low-down on rising interest rates and longer-term home loans. Picture: Monstera/Pexels
Most home loans are awarded over a 20-year repayment term, but did you know that you could qualify for a bond to be repaid over a longer time period?
ooba Group chief executive Rhys Dyer says banks will even grant a 30-year home loan – under certain conditions.
“The National Credit Act requires banks to lend responsibly, therefore, to avoid reckless lending, banks will generally only grant a loan term of 30 years to a borrower who is young enough to settle the bond by retirement age.”
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The definition of retirement age, he says, varies across banks and ranges between 65 years and 75 years.
You should bear in mind, however, that if you do take out a 30-year home loan, you will end up paying much more interest.
“The longer the bank’s risk is of being repaid, the higher the interest rate will be. Therefore the interest rate on a 30-year loan term will be higher than the rate on a 20-year loan term and will be determined by the borrower’s overall risk profile.
“In addition to which, borrowers with a 30-year mortgage pay more total interest than they would have paid on a 20-year loan term.”
Interestingly, ooba’s trend analysis shows that first-time home buyers are responding to the rising interest rates by opting for a longer-term home loan to improve their affordability, Dyer says.
“There’s a sharp uptick in 30-year mortgages by first-time home buyers – now at 26% of all home loans processed by ooba in Q2 ‘22 versus 16% in Q2 ’21, indicating the resilience of this market segment.”
Whether your home loan is taken over a 20-year period or longer, Ester Ochse, product head at FNB Integrated Advice, explains that when the interest rate goes up, so does your monthly repayment on your home loan – or any credit loan for that matter.
“For example, a R1 million bond repayment will cost about R485 more per month now that the interest rate has gone up by 0.75%. This will, unfortunately, limit your spending as goods cost more.”
To help you keep on top of your repayments, she offers the following quick tips:
See where your money goes and if there are ways to cut back on some of the spending you don't have to do.
“For instance, you could spend less on take-aways and treats and put that money toward your bond or other credit.”
This way, you'll know that your debit order has been paid and won't have to worry about keeping money aside for the rest of the month, Ochse says.
“Food prices have gone up in the last few months, so look for ways to save money on food, like buying non-perishables once a month and creating a weekly menu from the pantry. Then, only buy a few fresh things every week.”
Look on the bright side of interest rate hikes
One “good thing” about the interest rate cycle is that, if you have savings, such as emergency savings or you live off the interest from cash investments, the interest on these savings should also go up. This means that more interest will be earned, so more interest will be paid every month, she says.
“If you do free up cash via the tips above or alternatively the increase on interest paid on cash investments, think about using that to pay off any expensive credit that you may have, saving for an emergency, or putting towards your longer-term goals such as retirement savings.”
This month’s interest rate hike has pinned the interest rate at 9.75%, and there is still one more rate announcement coming in November – more than likely another increase.
While aspiring and existing owners may be fed up, Dyer explains that these increases are to be expected following the historically low interest rates offered during the Covid-19 pandemic period.
“Rates are simply returning to ‘normal levels’, but the good news is that strong competition between banks for home loans means that prospective homeowners will still benefit from attractive interest rate discounts when shopping around for a home loan.”
Although it can feel a bit daunting to consider how to afford the monthly home loan repayments when buying your first home, Adrian Goslett, regional director and chief executive of RE/MAX of Southern Africa, says it is possible to lessen this expense by paying a deposit.
In addition to increasing the chances of securing a home loan, there are many other reasons why a deposit will benefit buyers in both the short and long term.
In most cases, Goslett explains that a good deposit amount is usually around 10% to 20% of the seller’s asking price, but adds that you can pay more if you are able to and could possibly negotiate to pay less if you are unable to afford this amount.
“Remember that the higher your deposit, the lower the amount you will need to borrow from the bank and the lower your monthly instalments will be.”
To try and make it easier for first-time buyers to enter the market, however, financial institutions have become more willing to grant a 100% home loan, which means that first time buyers might not be required to pay a deposit to qualify for a home loan.
For those who do not have to pay a deposit, Goslett warns that there will be bond and transfer costs above and beyond the asking price that will be payable upfront, regardless of whether you have paid a deposit or not.
“This usually amounts to roughly 10% or more of the asking price. If you do not have this amount saved, you will either need to apply for a 110% home loan or take out a personal loan to cover these costs.”
To find a home to buy visit IOL Property.
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