The upside of rate hikes



As a prospective home buyer, it may seem impossible to see the “upside” of rate hikes, but the same rate hike that increases your debt also increases the money in your savings account.

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The same rule applies to home loan deposits that are placed in an interest-bearing account.

While deposits on home loans have remained a low priority for many during the Covid-19 pandemic, the latest statistics from the ooba Group’s Oobarometer Q3 ’22 show that more and more South Africans are realizing they are using deposits and earned interest to their advantage can see annual growth in average deposit size (as a percentage of purchase price) by a whopping 18.2%.

How Much Interest Will Your Deposit Earn?

To illustrate the beneficial effects of interest rate increases for homeowners who have posted a security deposit, it is helpful to compare the possible accrued interest of various security deposit amounts to the current interest rate (9.75%) and the November 2021 interest rate (7.25 %).

The Q3 22 Oobarometer found that the average national home purchase price is R1,402,408 and the average down payment is R127,567 (9.1% of the purchase price), so these figures are used as a starting point to calculate a realistic Value to Receive Showing the potential earnings of homeowners who elect to post a security deposit.

The upside of rate hikes
Source – Moneyweb

These potential earnings are calculated using the average time it takes to transfer a property, with three months being a relatively short time to see the maximum earnings. However, in cases where there are delays in the process or an out-of-plan purchase, a deposit may accrue interest for up to two years until the transfer is complete.

In this challenging economy, every edge counts, and the higher the deposit amount, the higher the potential win. “Set aside your earned interest to add to your monthly repayments once the transfer is complete – this will help you pay off your bond sooner.”

Tips for maximizing deposit returns

Homeowners who want to maximize the return on their security deposit should consider the costs associated with administration—especially if the security deposit is being paid to a transferring attorney.

Homebuyers are required by law to pay 5% of total interest accrued to the Legal Practitioners Fidelity Fund and also pay the “hidden” administrative costs of a deposit such as the price of a bank guarantee and obtaining a FICA registration. The buyers have no transparency about their money as their deposit is held on behalf of the seller.

The second option for managing your deposit – turning it over to a real estate agent – does not oblige the transferring attorney to pay more than 5% of the total interest. However, many real estate agents no longer offer this service following the change in the Property Practitioners Act earlier this year.

Buyers Trust is a third-party option that aims to maximize deposit returns by incorporating all management costs into their minimum management fee, which is 1% of interest accrued. Opening the account in the buyer’s name gives the buyer more transparency about their deposit investment until the transfer process is complete.

Buyers Trust was created to reward tax-savvy homebuyers for their decision to put down a down payment, as this decision demonstrates discipline and long-term thinking.

We encourage buyers to put this interest income to good use by offsetting it against reclaiming some transaction costs, or it can be repatriated by using it to pay off a home loan.

Jackie Smith, Head of Buyers Trust.

This article originally appeared on Moneyweb and has been republished with permission.
Read the original article here.

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