Bond Interest Charges | BUYING YOUR FIRST PROPERTY
Watch Interest Charges!
Everyone speaks about it and very few actually get to own property. Like any investment, there are risks. However, property is perhaps the fairest maiden when it comes to investments, more especially to a novice investor. It is perhaps the most useful investment; in the sense that, you get great usage and over time capital appreciation. There are however a few costs one needs to be cognisant of. Most obvious being your purchase price and perhaps not always on the radar are interest charges.
The rationale behind investing in property is not that complicated; as a start - you need a roof over your head; why not own it? Now that you’ve made the decision to buy, what should you be considering? Where to buy? When? Is timing important? Making sure you don’t overpay, not just on the actual property but on your cost of financing: there’s a lot of emphasis placed on the purchase price (understandably the most obvious), and yet interest rates seem to pass below the consciousness of a lot of buyers. Here is an illustration on how punitive interest rates can be:
You purchase an apartment for R1 Million. For illustration purpose, take this as the financed amount. Your bank gives you an interest of 'Prime +2'. Excited to have your bond approved, you pay no attention to what “Prime +2” means. Your monthly payments on your 20 year bond are – R10 000.00.*
You purchase the same apartment for R1 Million, but this time you have a little more information, so you ask your bank really nicely and say “Please! May I receive 'Prime -2'” They come back with some long winded answer about it being your first property and you calmly say “Please!” They get back to you with an offer at 'prime -1.5'. Your monthly payments are - Your payments are R7 900.00*
This is the same property and the only change was the interest rate that you are charged for. You may wish to ask the question; if I paid the same amount (R10 000.00 monthly payment). What would I be able to purchase for? This would translate to apresent finance amount of R1.25 Million. That is, the better interest rate arrangement allows you a saving of R250 000. 00 in today’s value terms. Simply put in the first illustration, a 2011 Land Rover Defender 90 was (mistakenly) left for you in your parking bay when you signed at 'Prime +2'.
Point being; your interest charge may be the single largest cost determinant.
Notes: * Calculation is based on a prime rate of 11.25% and a 20 year , 0 deposit bond, payments in advance.
Mhlaba Property Company is a Boutique Property Management and Transactional Company
K2015168430: Registration 2015/168430/30
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