How to take advantage of stagnant interest rates
Yesterday the South African Reserve Bank’s Monetary Policy Committee announced that the prime lending rate would remain unchanged at 10.25% and the repo rate at 6.75%. The news was welcomed by many players in the local property market – but many also warned that interest rates were still more than likely going to rise this year.
“I would recommend that homeowners tighten their belts now in preparation for incremental increases throughout 2019 by investing an extra 0.25% of their home loan instalment in an interest-bearing account,” says regional director and CEO of RE/MAX of Southern Africa, Adrian Goslett. “That way, if an increase occurs, homeowners will be prepared for living off a slightly smaller amount. Also, there will be a little emergency money set aside to provide for some financial breathing space if necessary.”
Alternatively, Goslett suggests that homeowners reinvest the money they would have spent if interest rates had increased straight back into their home loan.
“By means of an example, a R1,5m property at a 10.25% interest rate will cost you more than R3,5m over a 20-year period of instalments,” he says, noting that the monthly instalments would work out to be roughly R14,700. “By putting in just an extra R300 per month towards your bond, the repayment period would be shortened by over a year, saving you R130,000 – enough to buy an entry-level car. Putting in an extra R500 per month would shorten the repayment period by two years and save you around R200,000, which is enough to buy a slightly nicer car or put your kid through high school with some change to spare.”
There are, of course, other ways to invest the money. Consider adding it to your retirement annuity.
The government wants you to save so that it won’t have to look after you when you outlive your money. To motivate you to save enough there exist a couple of incentives. One such incentive is the pre-tax contribution you can make every year of up to 27.5% of your income for the year (capped at R350,000). By aiming to save up to your maximum allowable deduction SARS will actually owe you money come tax season, and you’re building a nice nest egg.
The good news is that you still have time to build on your RA before the SARS deadline on 28 February.