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Homeowners, don’t pocket your interest rate 'savings'
The South African Reserve Bank’s decision to keep the repo rate at 6.25%, thereby ensuring that the bank’s prime lending rate will stay at 10.25%, and the likelihood of rates dropping in the near future, give wise bondholders an opportunity to consolidate their position.

Rowan Alexander, Director of Alexander Swart Property, says he and certain other property professionals predict rates will drop by 0.25% to 0.5% in the short to medium term.

His advice to bondholders is to maintain and possibly even increase the current level of their monthly repayments. Do not simply accept the fact that you will now have a little more spending money, he says, rather use it instead to shorten your bond repayment period.

Alexander says a 0.5% cut on a R1 million bond will mean that bondholders will pay R331 less per month, and in all probability another R200 or more less on their credit card, vehicle and other accounts.

Today’s young fast-moving middle class are likely to see a R500 saving per month as insignificant - but it is not, he says. “If they use that extra cash to pay off their bonds, supposing that rates remain constant, they could shorten their bond repayment time by just over three years - and pay a total of over R280 000 less on their bonds, a very big saving by any standards.”

Alexander says this wise approach may well call for a certain austerity, but it will also give peace of mind because paying slightly above the stipulated amounts, bondholders can build up a cash buffer for possible use in future unforeseen hard times when they may find themselves struggling to meet their bond repayments.

“We all know, as has been much publicised, that today’s yuppie generation tend to have an instant gratification ‘I want it now’ approach to their finances,” says Swart.

“However, it is also clear that this is changing fast as a result of South Africa’s economy no longer being on a steep upward path. Those who, rightly, see the quick paying off of their bonds as a top priority and their best means of building up their assets, will follow our advice and do just that.”

Source: Property24
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