Real Estate Investor Magazine South Africa October 2014 | Page 36

FINANCE

BY YVETTE FOURIE

How Interest Rates Impact

House Prices
and how you can benefit...

M

ethods used by banks to keep an economy
humming generally equates to adjusting
the supply of money into the economy.
One of the tools used is the interest rate. Adjusting
interest rates impacts on the general prices of goods
and services, as well as employment, thereby affecting
spending and saving. So, adjusting interest rates is an
attempt to control spending and lending.
Low interest rates
The low interest rates during 2004 - 2006, and again
since 2009, caused house prices to rise, because lending
is cheaper. While the Global Financial Crisis caused
a dip in house prices in 2008, the interest rates were
dropped to the lowest it has been in decades, boosting
house prices yet again. The result: house prices rose by
10% in 2012 and 2013.
Although the rate of growth in mortgage loans
has slowed to less than 5%, it is adding to a high base
created by a massive 195% growth since 2003 - and
therefore it could be perceived as rather unbalanced.
Low interest rates encourage lending. This means
that when interest rates rise, the percentage of debt to
income balloons. In addition, raised interest rates make
it harder to borrow money and therefore property
prices will have to stabilise and possibly even come
down. The boom in the property sector, therefore, was
caused by unusually low interest rates.
Impact of interest on mortgage lending
Let’s consider the impact of interest on mortgage
lending, using an example of a 20-year (240-month)
mortgage loan on a R1 million property.

Interest rate 9.5%
Monthly repayment
R 9,321.31
Total interest over the 20 years R 1,237,115.77
Increase in monthly repayment
Increased interest paid over term

Interest rate 10%
R 9,650.22
R 1,316,050.00
R 328.91
R 78,934.23

If you pay the minimum monthly repayment of
R9,321.31 for five years, you would have paid a total
of R579,013, but you would have repaid just R100,000
of the R1 million loan, leaving you with R898,024 debt
that must still be settled. That is the impact of interest.
If the interest rate is raised from 9.5% to 10%, the
monthly repayment will increase by R328.91 and over
the 20-year term, you will pay an additional R78,934.23
in interest.
However, you can use this to your advantage. For
example, if you don’t wait for an interest rate increase
and pay an additional R328,91 into your mortgage
loan while the interest rate is at 9.5%, you will shorten
your 240-month mortgage term to 218 months and
save more than R130,000 in interest.
Do the sums
When buying a home and committing to a 20-year
mortgage loan that is subject to fluctuating – and often
crippling – interest rates, most people don’t do the
sums. That is why between 10,000 and 30,000 South
Africans are losing their homes every year.
Forward-thinking and applying the principles of
compound interest to your mortgage loan can turn
your financial future around. A mortgage loan is one
of the biggest loans you will take in your life. If you
buy sensibly and apply compound interest principles
from the beginning, it could save your property
during difficult financial times and when interest rates
inevitably rise from their current historic lows.
Protect yourself by applying compound interest
principles now. If the interest rate rises and you’re
applying compound interest principles to your
mortgage loan, you will benefit. In fact, with a little
fancy foot work and very little out of your pocket, you
can pay off your mortgage in as little as seven years.
To find out how, visit www.mortgagerecovery.co.za and
navigate to the MORTGAGE DEFLATOR.

RESOURCES
CAPINT

36

October 2014 SA Real Estate Investor

www.reimag.co.za