Your bond is still the best investment

SA consumers are always being urged to save more, but often have no idea where to put any savings they can make and get them to grow.

There is, it seem, a vast array of investment options, with varying levels of risk and return, and many find the whole subject bewildering and not a little frightening.

However, while it may be exciting to watch your spare capital earn interest or dividends, there are few, if any, investments that will give you the same rate of return as paying this money into your home loan account.

To understand this, you need to know that if you have a home loan, a very large part of the monthly repayment you make is allocated to paying off the interest on that loan and not the loan itself, especially for the first few years.

For example, if you have a new R1-million bond at the current prime interest rate of 8,5%, your monthly repayment will be about R8 700 – and around R7 000 of that will go towards interest, with the principal debt being reduced by R2 000 a month or less for the first three years of the loan.

In fact, unless you do something about it, the total amount of interest you will pay over the 20-year life of the bond will be R1,1-million – or more than the original price of your home.

Fortunately, there is something you can do, which is to pay any spare capital you have, including inheritances, bonuses, and monthly savings, into your home loan account. If you were to pay, just 10% more than your minimum required bond repayment every month (R870 in our example) you would cut four years off your loan repayment period, and save more than R250 000 in interest.

Put another way, you will have made a return of almost 50% on the additional R167 040 you have paid (R870 x 192 months) – and much more if you take into account that your bond repayments are made with post-tax income. At the same time you will benefit from capital growth, which is the real (after inflation) increase in the value of your property. This is expected to average at least 4 – 5% a year until 2020.

Alternatively, you could decide to put your savings in the bank. However, the highest savings rate currently being offered on a bank fixed deposit is 8,5% a year, and that is applicable only to investors who are able to immediately deposit R100 000 and leave it there for five years. The highest rate available on a money market account is 4,75% a year (applicable to investors with R500 000 to deposit), and the best rate payable on an ordinary savings account is 5% a year.

You might also think of investing your savings in the stock market, which generally produces somewhat higher returns than property. In the 12 years to end-2012, growth in the value of JSE shares averaged 13,3% a year, and growth in the value of residential property only 10,5%.

However, property has the advantage of being able to provide a roof over your head at the same time that you are saving/ investing, and it must be remembered that by speeding up the repayment of your home loan, you are investing in debt-repayment, which is risk-free – unlike an investment in the stock market, which can be very volatile.

Meanwhile, if you’re worried about being able to access your savings in case of an emergency, you should arrange a facility with your bank whereby you can, if necessary, access the additional amount of capital paid off your home loan.

The growing importance of pre-approval

Almost half the SA consumers currently classified as “credit active” are having trouble paying their bills – a statistic that is very worrying (or should be) for both property sellers and their agents as well as those who own rental properties.

According to figures just released by the National Credit Regulator (NCR), there were 20,08-million credit-active consumers registered with SA credit bureaux in the first quarter or this year, compared to 19,97-million in the previous quarter.

Of these consumers, only 10,55-million (52,5%) were rated as being “in good standing” while 9,53-million (47,5%) had “impaired” credit records.

Altogether, they were responsible for almost 71,73-million accounts (or at least three accounts each), some 18,31-million of which were impaired in some way.

Credit impairments can of course include an occasional late or partial payment of an account, as well as more serious defaults and judgements for debt.

However, the latest statistics undoubtedly indicate that more and more consumers are having some sort of trouble balancing their budgets – as indicated also by the latest statistics from the TPN Credit Bureau which show that between 25% and 50% of tenants (depending on the monthly rental bracket) did not pay their rent in full and on time in the first quarter.

It is also worth noting that the automated home loan application assessment processes now used by most banks generally don’t distinguish between major and minor credit impairments. A bad record is a bad record as far as they are concerned, and will usually lead to the bond application being rejected.

This underlines, once again, how important it is for prospective property buyers to obtain proper pre-approval for finance, preferably through a reputable mortgage originator such as BetterBond, which can and does assist potential buyers to repair their credit histories when necessary and is prepared to motivate individual applications.

Pre-approval, as opposed to prequalification, is the process in which the financial circumstances and credit records of a prospective buyer are thoroughly examined and assessed so that a lender can confidently issue a letter confirming that he or she has been approved to buy a home for a certain amount.

The benefits are that the would-be buyer knows what he can afford, that the agent knows what type of property to show him or her, and that the home seller can rest assured that the buyer is in fact in a position to raise the necessary finance. In short, peace of mind all round.

House prices up but growth slowing

According to the latest statistics released by BetterBond, SA’s biggest mortgage originator, the national average home price has shown positive growth of 9,3% in the year to end-June, compared with just 3,7% in the previous 12 months.

However the BetterBond statistics, which cover 25% of all residential mortgage bonds being registered in the Deeds Office and include applications to, and bond grants from, all the major lending banks in SA, also show that the average home price increased by just 1% in the June quarter, compared with a 6,6% increase in the first quarter of this year. (See table)

“This clearly illustrates the dampening effect that high cost-of-living increases are having on the real estate market,” says BetterBond chairman Rudi Botha. “In the past three months, the extra funds injected into household budgets by January salary increases and February personal tax cuts have been absorbed by sharp increases in the cost of transport (especially fuel) and utilities (especially electricity).

“As a result, consumers are struggling to make ends meet, and while the demand for property remains high, the decline in disposable incomes is putting a lid on what potential buyers are able to afford – and what banks are prepared to lend them.”

On the other hand, he says, the banks appear to have more confidence in the long-term future of the market than they did a year ago, because the average percentage of purchase price required as a deposit has dropped from 20,9% to 16,3%. “This is also in line with the efforts of most banks now to scale back on unsecured lending such as personal loans and increase secured lending such as home loans, which are a lot less risky.”

In the first-time-buyer sector of the market, the BetterBond statistics show that the average home price rose 7,8% in the year to end-June, compared to a 2,9% increase in the previous 12 months.

However, the average first-time-buyer home price in the June quarter was actually 0,4% below that in the first quarter of the year, following a 2,9% increase in the three months to end-March.

“And here too, the average percentage of purchase price required as a deposit has declined, from 12,1% a year ago to 8,3%,” says Botha. “This means that with price growth having flattened off now, it should be somewhat easier for new buyers to get a foothold in the market.

“Having said that, though, all potential buyers should be prepared for the fact that the banks’ credit granting criteria are still very tough, and that they will more likely than not only be able to secure a loan at an interest rate one or two percentage points above prime.”

Where to find the cheapest homes in SA

The Eastern Cape is still the province with the least expensive real estate in SA, even though prices there have risen by an inflation-beating 7% in the past 12 months to an average of R663 000.

That’s the word from BetterBond, SA’s biggest mortgage originator, which is responsible for 25% of all residential bonds registered in the Deeds Office – and keeps track of home loan applications to, and bond grants from, all the major lenders.

The Western Cape, the BetterBond statistics show, is still the most expensive region in which to buy a home, even though prices there have only risen 3,5% in the past year. The average in the province now stands at R1,07m.

It is, however, the Free State which has experienced the highest rate of price growth over the past year (12,8%); followed by Limpopo (12%) and Mpumalanga (10,7%).

Home prices in these three regions now average R731 000, R715 000 and R847 000 respectively, and while the high growth rates have pleased existing owners and investors, they have obviously made it more difficult for first-time buyers to gain entry to the market.

One reason for the rapidly rising prices in these three provinces could be the fact that despite rapidly rising demand – especially in Bloemfontein, Polokwane and Mbombela – there have been hardly any new homes built there in recent years.

According to StatsSA, only 1000 new houses were built in the Free State during 2012, compared to about 14 000 in Gauteng and 9000 in the Western Cape. The year saw some 1500 new houses being built in Mpumalanga, and just 300 in Limpopo.

The StatsSA figures also show that only 900 new flats and townhouses in total were built in the Free State, Limpopo and Mpumalanga in 2012, compared with 5000 in Gauteng and 3000 in the Western Cape.

The good news is that developers have seen the potential in this situation and are planning to build many more homes in the Free State, Limpopo and Mpumalanga. Plans passed for new houses in the Free State totalled 2000 in 2012, and those for new flats and townhouses some 800. House plans passed for Limpopo and Mpumalanga totalled around 3300, and those for flats and townhouses around 900.

Meanwhile, the below-inflation price increases achieved in the Western Cape as well Gauteng (1,3%) and KwaZulu-Natal (-3%) in the past 12 months indicate that there is still a surplus of stock to be absorbed in these provinces, making them a good bet for both homebuyers and investors.