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Staff Writer

How much money you need to earn to afford a R1 million home



The real estate industry is still celebrating last month’s Reserve Bank announcement of a 0.25 percentage point cut in interest rates.


The adjustment took the repo rate from 8.25% to 8%, and the prime lending rate - and home loan base rate - from 11.75% to 11.5%.


“Most economists agree that it also signals the start of a rate-cutting cycle that will last well into next year and may well see the prime rate fall to below 10% - barring any unforeseen global or local disasters that cause a sudden increase in inflation,” said Stephen Whitcombe, MD of the Firzt Realty group.


“As it is, the annual inflation rate has been declining since the start of this year and dropped to 4.4% in August, down from 4.6%. This puts it below the midpoint of the Reserve Bank’s preferred 3% to 6% range and, given the current strength of the rand, it is expected to decline even further and create space for further rate cuts.”


South African Reserve Bank Governor Lesetja Kganyago noted earlier this month that inflation could dip below 4% in the coming months, offering more flexibility for further policy action after September's interest rate cut.


“We expect the next two or three prints; that they could have a three handle on them, and that provides policy space for us,” Kganyago said.


He attributed the reduction in headline inflation to the fading impact of global supply shocks. The central bank’s projections indicate consumer price growth settling at 3.6% by the end of this year and averaging 4% in 2025.


In the broader economy, additional rate cuts will accelerate growth and drive job creation. In the real estate sector, they will bring the following positive impacts:


For existing homeowners, the majority of whom have variable-rate home loans, interest rate cuts mean an immediate decline in the minimum monthly repayment. This makes the loan more affordable and reduces the chance of them defaulting and losing their home.


The most recent cut, for example, reduced home loan repayments by around R17 for every R100 000 outstanding – or R170 per R1 million.


“This may not seem like much, but rate reductions also mean smaller repayments on other forms of debt such as car finance, personal loans and credit and store card balances, and the combined savings give homeowners even more ‘room to breathe’," said Whitcombe.


“In fact, they may even give them an opportunity to pay off more than the minimum on their home loan each month – a practice which will increase their equity in the property - and could save them many thousands of rands over the life of their home loan.”


For example, paying just R200 a month more on a home loan of R1 million would cut your repayment time by 14 months and save you almost R125,000 worth of interest on a 20-year loan with an interest rate of 11,5%.


As lower interest rates make homes more affordable, homeowners are also likely to see the demand for housing go up and the value of their properties increase.


For homebuyers, interest rate cuts mean smaller home loan repayments and greater affordability. This means, said Whitcombe, that buyers may be able to purchase a home sooner than they thought, or that they may be able to afford a more expensive home than they could at higher interest rates.


The most important factor in these decisions is the fact that at lower rates, they will need to earn less to qualify for a home loan.


Using the rule of thumb that the monthly bond repayment should not exceed 30% of gross household income, buyers would need an income of R36 100 to qualify for a R1 million home loan at 11.75%, but only R35 500 to qualify for the same loan at 11.5%.

“In addition, lenders tend to lower deposit requirements when interest rates fall, and to be more willing to advance credit, making home ownership even more affordable and attainable.”

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