Home buyers and property investors who have resisted the temptation to go for the lowest possible mortgage bond payments while these payments are currently so low have been pleasantly surprised to find how beneficial this decision has been in improving their bond accounts, says Bill Rawson, Chairman of the Rawson Property Group – and, he adds, he has done this on his own portfolio, with highly satisfactory results.
“When a bond holder repays his debt at, say, 2% above his previously agreed rate, his capital position will improve far more rapidly than he probably expects,” said Rawson.
An example given recently by Mike van Alphen, National Manager for the Rawson Property Group’s bond origination division, Rawson Finance, has shown that if a bond holder who had taken out an R800,000, 20 year fluctuating bond at the prevailing mortgage rate of 15.5% in 2008 and had maintained his payments at the original levels, he would have accumulated an extra R140,000 of capital and would have reduced his payment period by 24 months in just under four years. If he continued to maintain his payments at this level, says Rawson, he would actually pay off his entire bond in nine years.
“Bond holders should try to arrange matters with their banks so that they can treat their mortgage bond as their bank account,” said Rawson. “This means that whenever they get any extra cash, for example, a Christmas or performance bonus, this extra sum should be paid into their bond account. In addition, employees should try and arrange for their monthly salaries to be paid into their bond account and for the sums they need for daily living to be drawn as and when necessary. These larger extra sums in the bond account, can result in an overall interest and time saving of above 25%.”
When the time does come to wrap up the bond, added Rawson, bond holders should ensure that they do not incur the usual penalties levied on anyone who does this without giving three months’ notice.
“I have never understood the reasoning behind this penalty clause which is applied by so many banks,” said Rawson, “because the bank can earn good interest on the money repaid by the bond holder.
Nevertheless, the fact is that the banks do impose this penalty and one must take great care to avoid it.”
Rawson also warned that those who close a bond account today may find that under the new National Credit Act they no longer qualify for a new, possibly larger bond, even though they can put down a fairly big deposit.
When asked how long he expects the current low 8.5% prime rate to remain intact, Rawson said that the poor growth rate in the economy calls for the rate to be maintained as low as possible. However, Rawson says that the inflation rate is heading upwards and, if and when it stays above 6%, this will probably make it essential to raise the interest rate. This, Rawson believes, is likely to happen by 2015.
