buying a house advice

[SauRoNZA]

Hi everyone

Is it advisable to take a variable interest rate when buying a house? Especially with the current political conditions of SA.

Simple answer is yes.

The Fixed Interest is going to be +2% of the variable interest offered.

So simply create your own Fixed Interest Rate to absorb the fluctuation of the variable one.

What I mean by this is boost your Installment Debit Order by 2% (preferably more) from the very start.

That way if the interest rate does go up you are already prepared for it, if it doesn't go up you save on interest and pay your bond off faster.

 

[SauRoNZA]

I'd advice and say get a fixed rate, most definitely. Interest rates can go up as high as over 20% like it did in the 80s, or as high as over 15% during Tito Mboweni's tenure. You can easily budget with a fixed rate. I personally have a variable interest rate because I thought a fixed rate only applies to motor vehicle financing.

The very last line of your post indicates that you agree you don't know what you are talking about.

Which was pretty much my opinion of the first part of the post.

You don't base your future financial decisions on the anomalies of the past. You base it on the mean average.

 

[Sly21C]

The problem with this approach is that they only let you fix it for 2 years at 2% above the current variable rate (give or take) so there is almost no way that the variable rate will go above the fixed rate in the time frame that they have given.

I doubt that's the case for all mortgage lenders?

 

[Sly21C]

And by how much has it increased since you signed? If you do not mind sharing

Not by much. My interest rate payment went from 9.2% to 10.7% in 3 years.

 

[Borrels]

I doubt that's the case for all mortgage lenders?

If not 2 years then 3 years max. I've not​ heard about any lender that will fix it dor the long term

 

[Sly21C]

The very last line of your post indicates that you agree you don't know what you are talking about.

Which was pretty much my opinion of the first part of the post.

You don't base your future financial decisions on the anomalies of the past. You base it on the mean average.

You sound like that's what you've been taught at school, or by some smooth talking economist. So you're saying worst case scenarios shouldn't be taken into consideration as a risk factor when making huge financial decisions? Only the mean average? Where did you learn that? So people should ignore the subprime bust in 2008 and just take the mean average?

 

[saturnz]

You sound like that's what you've been taught at school, or by some smooth talking economist. So you're saying worst case scenarios shouldn't be taken into consideration as a risk factor when making huge financial decisions? Only the mean average? Where did you learn that? So people should ignore the subprime bust in 2008 and just take the mean average?

people should just ignore what you say

 

[Sly21C]

people should just ignore what you say

Let people speak for themselves, you're not their spokesperson.

 

[saturnz]

Let people speak for themselves, you're not their spokesperson.

they can speak for themselves, I'm just giving them advice not to take you seriously, I have not made any representations on anyone's behalf

your views on this matter are at best reckless

 

[diapason]

I'd advice and say get a fixed rate, most definitely. Interest rates can go up as high as over 20% like it did in the 80s, or as high as over 15% during Tito Mboweni's tenure. You can easily budget with a fixed rate. I personally have a variable interest rate because I thought a fixed rate only applies to motor vehicle financing.

Interest rates reached 25% in 1985 and 1998. However, for much of our history rates were significantly in excess of 15%. See this link for historical rates.

http://liberta.co.za/blog/prime-interest-rate-in-south-africa-current-and-historical/

It was against a recent background of much higher rates than currently that we reached those peaks.

 

[saturnz]

Interest rates reached 25% in 1985 and 1998. However, for much of our history rates were significantly in excess of 15%. See this link for historical rates.

http://liberta.co.za/blog/prime-interest-rate-in-south-africa-current-and-historical/

It was against a recent background of much higher rates than currently that we reached those peaks.

the peak is not relevant, how long they were at those levels is more important, especially considering fixed term interest rate contracts are at most five years long, you would almost have to time it perfectly to reap any reward out of it

edit: just looking at those numbers it seems a fixed term contract of five years is sort of the shortest term that would reap any benefit, taking out a 3 year contract would not have yielded much results over that time frame

 

[SauRoNZA]

You sound like that's what you've been taught at school, or by some smooth talking economist. So you're saying worst case scenarios shouldn't be taken into consideration as a risk factor when making huge financial decisions? Only the mean average? Where did you learn that? So people should ignore the subprime bust in 2008 and just take the mean average?

If you are going to think like that then the logical conclusion should be not to get a home loan at all.

As was illustrated above already the fixed term can only be locked in for a very short period and has been proven over time and time again you are generally giving your money away when doing so.

If the interest rate really does go to **** as per your backwards projection then the fixed interest rate won't save you in any case.

As I already illustrated in my very first post in this thread is rather build your own fixed interest rate into your repayments than volunteer even more money away to the bank.

Sadly financial education isn't what it should be in school, so no I certainly didn't learn it from there.

 

[diapason]

the peak is not relevant, how long they were at those levels is more important, especially considering fixed term interest rate contracts are at most five years long, you would almost have to time it perfectly to reap any reward out of it

edit: just looking at those numbers it seems a fixed term contract of five years is sort of the shortest term that would reap any benefit, taking out a 3 year contract would not have yielded much results over that time frame

Exactly. And in that 5 year time frame rates could also come down and he'd be stuck with that higher rate for longer.

 

[Sly21C]

If you are going to think like that then the logical conclusion should be not to get a home loan at all.

As was illustrated above already the fixed term can only be locked in for a very short period and has been proven over time and time again you are generally giving your money away when doing so.

If the interest rate really does go to **** as per your backwards projection then the fixed interest rate won't save you in any case.

As I already illustrated in my very first post in this thread is rather build your own fixed interest rate into your repayments than volunteer even more money away to the bank.

Sadly financial education isn't what it should be in school, so no I certainly didn't learn it from there.

The main reason I advised he take out a fixed rate was because he can control his budget, even though interest rates might reach as high as 30% for the first time in history for example. Sadly, it looks like banks don't offer mortgages that are packaged with fixed rates for the full term of the mortgage agreement.

I think it's always a good idea for people to plan for the worst case scenario as much as possible. People's psychology or human nature tends to only focus on the current and very recent scenarios like low interest rates. People would say "Trump will never win", he's crazy. Just because something never happened doesn't mean it won't. Interest rates could rise to 30% or something because of securitization or something of the sort.

 

[saturnz]

The main reason I advised he take out a fixed rate was because he can control his budget, even though interest rates might reach as high as 30% for the first time in history for example. Sadly, it looks like banks don't offer mortgages that are packaged with fixed rates for the full term of the mortgage agreement.

I think it's always a good idea for people to plan for the worst case scenario as much as possible. People's psychology or human nature tends to only focus on the current and very recent scenarios like low interest rates. People would say "Trump will never win", he's crazy. Just because something never happened doesn't mean it won't. Interest rates could rise to 30% or something because of securitization or something of the sort.

go back to that interest rate timeline pasted earlier and see where a fixed rate would have benefited you

the argument that you can now control your budget is flawed- you are just giving your money away, refer to my above point. As a counter strategy, you can simply rent out the property and claim the interest as a tax expense to mitigate the rate increases.

also if interest rates do go up significantly, you can simply sell the property and deleverage if its something you can no longer afford, and if interest rates do hit 30%, you together with everyone else will have huge problems, I doubt a fixed bond rate will help you much in such an environment.

 

[Sly21C]

go back to that interest rate timeline pasted earlier and see where a fixed rate would have benefited you

the argument that you can now control your budget is flawed- you are just giving your money away, refer to my above point. As a counter strategy, you can simply rent out the property and claim the interest as a tax expense to mitigate the rate increases.

also if interest rates do go up significantly, you can simply sell the property and deleverage if its something you can no longer afford, and if interest rates do hit 30%, you together with everyone else will have huge problems, I doubt a fixed bond rate will help you much in such an environment.

I'm sorry friend, not only are you short sighted, you're impractical too. Simply rent the property and live where? Never mind. I'm out of here...

 

[SauRoNZA]

The main reason I advised he take out a fixed rate was because he can control his budget, even though interest rates might reach as high as 30% for the first time in history for example. Sadly, it looks like banks don't offer mortgages that are packaged with fixed rates for the full term of the mortgage agreement.

.

And that makes perfect sense which is why I also advised to simply set your own fixed interest rate by boosting your debit order.

Easy to budget for and easy to accommodate a shift in interest rate without really feeling it.

Say your interest rate is 10% now and your instalment amounts to R9900.

You increase it by 2% to R10080 now which is what the bank would have made it if you took the deal.

Now you are saving R180 a month or R2160 a year or R6480 over three years.

If the interest rate suddenly shot up by 5% in year three it would need to sustain that level for 14 months before it even breaks even with what you already saved by not taking the fixed term rate but paying it as such.

Sure it could potentially reach levels of 20% or even higher but as was historically proven that is rarely sustained long term an also don't happen instantly.

And although not impossible it would need to seriously bad or perfect timing depending how you look at it for the fixed term interest rate to make you a winner.

The odds are much higher based on historical data that you would be volunteering your money away to the bank.

****

Disclaimer it's 1:26 and the math might be somewhat off as I just did it on a very basic level quickly but it should be good enough to illustrate the point.

 

[saturnz]

I'm sorry friend, not only are you short sighted, you're impractical too. Simply rent the property and live where? Never mind. I'm out of here...

and interest rates reaching 30% is "practical"

you are the one that's short sighted, you provided reckless advice, rather move on

 

[Sly21C]

And that makes perfect sense which is why I also advised to simply set your own fixed interest rate by boosting your debit order.

Easy to budget for and easy to accommodate a shift in interest rate without really feeling it.

Say your interest rate is 10% now and your instalment amounts to R9900.

You increase it by 2% to R10080 now which is what the bank would have made it if you took the deal.

Now you are saving R180 a month or R2160 a year or R6480 over three years.

If the interest rate suddenly shot up by 5% in year three it would need to sustain that level for 14 months before it even breaks even with what you already saved by not taking the fixed term rate but paying it as such.

Sure it could potentially reach levels of 20% or even higher but as was historically proven that is rarely sustained long term an also don't happen instantly.

And although not impossible it would need to seriously bad or perfect timing depending how you look at it for the fixed term interest rate to make you a winner.

The odds are much higher based on historical data that you would be volunteering your money away to the bank.

****

Disclaimer it's 1:26 and the math might be somewhat off as I just did it on a very basic level quickly but it should be good enough to illustrate the point.

I'm still surprised as to why fixed rates are not available in this country, it seems to be available in other countries according to Wikipedia.

A*fixed-rate mortgage*(FRM), often referred to as a "vanilla wafer" mortgage loan, is a fully*amortizing*mortgage loan*where the*interest rate*on the*note*remains the same through the term of the loan, as opposed to loans where the interest rate may adjust or "float". As a result, payment amounts and the duration of the loan are fixed and the person who is responsible for paying back the loan benefits from a consistent, single payment and the ability to plan a budget based on this fixed cost.

 

[diapason]

And that makes perfect sense which is why I also advised to simply set your own fixed interest rate by boosting your debit order.

Easy to budget for and easy to accommodate a shift in interest rate without really feeling it.

Say your interest rate is 10% now and your instalment amounts to R9900.

You increase it by 2% to R10080 now which is what the bank would have made it if you took the deal.

Now you are saving R180 a month or R2160 a year or R6480 over three years.

If the interest rate suddenly shot up by 5% in year three it would need to sustain that level for 14 months before it even breaks even with what you already saved by not taking the fixed term rate but paying it as such.

Sure it could potentially reach levels of 20% or even higher but as was historically proven that is rarely sustained long term an also don't happen instantly.

And although not impossible it would need to seriously bad or perfect timing depending how you look at it for the fixed term interest rate to make you a winner.

The odds are much higher based on historical data that you would be volunteering your money away to the bank.

****

Disclaimer it's 1:26 and the math might be somewhat off as I just did it on a very basic level quickly but it should be good enough to illustrate the point.

The math is more than somewhat out:crylaugh:

Remember that the payment you mention is initially made up mostly of the 10% interest. You would therefore have to add roughly 20% to that to cater for the extra 2 percentage points. That's a cost of roughly R2000pm to fix the rate.