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IF YOU are looking to invest in commercial property, you should take the time to learn about the type of finance you are getting involved in, says Jason Elley, founder of Commercial Space.
Commercial property finance comes with an interest rate attached, and this is the fee that the bank imposes on you for borrowing their money for your purchase. Your initial loan amount for the property you choose to purchase is referred to as the original capital balance.
Once the interest rate is added to it, the total loan amount is settled on.
When buying property, the prime Interest rate is used to dictate what your interest rate is. Whether it is higher or lower than the prime interest rate will depend on the following few factors:
• Your credit profile;
• The total value of your loan; and
• The loan period requested.
At the end of each month, your interest rate is recalculated on the value of the loan remaining. This is the main way in which the interest rate can affect your loan, especially for your commercial property.
Commercial property is usually paid off over a longer period than other loan types, and those who choose to take the maximum loan repayment period will suffer from the effects of the interest rate over the years. In order to keep your loan amount low so that it can be quickly paid off, you need to ensure that your repayment period is kept as short as possible.
When shopping around to find the right property for you, you should take the total loan amount into account and use a bond calculator or similar to calculate the monthly rate, interest rate and so on. It is always a good idea to speak to an impartial adviser to find out how the interest rate can affect your commercial property loan.
Are interest rates going to go up again? Is this the start of an upward cycle?
When trying to determine whether interest rates will go up, one merely needs to look at inflation and see what this is doing. Rule of thumb is that as inflation rises, interest rates are likely to rise as well. Why is this the case, you might ask, or rather, what is the correlation between inflation and interest rates?
Let me explain this by using an example.
Let’s say you lend a friend some money today and he/she agrees to pay you back in eight years. By that time, the price for everything would have gone up, right?
So the money you lent him/her will be able to buy you more things today than it would in 2022 when he/she repays your money. To make up for that loss in the value of the money, you charge him/her interest.
What this means: interest protects you against future inflation rises
What inflation does over the next few months will therefore have a direct impact on interest rates.
To be honest, with the cost of petrol being the highest it’s ever been and a huge shortage in our maize supply as a result of severe drought up north (maize is a valuable food source for farmers to feed their cattle, sheep, chickens and so on), I can only see inflation going up before it starts coming down.
Please, do take heed of this before opening yourself up to more debt. Consult with an expert on an accurate lending plan before acquiring any substantial property. Be prepared for further interest rate increases of another potential 1% throughout this year.
But as mentioned above, this is completely dependent on what happens with inflation and if it starts to spike, then an increase of more than 1% over 2014 is very possible.
Rand depreciation: why, and what has caused it?
The rand has depreciated 40% since 2011. Very simply put, one of the main reasons for the depreciation is mainly due to the lack of demand in our local bonds and stock market.
Our market depends heavily on foreign investors buying our bonds and stocks and when a sell-off takes place due to some or other reason, the rand depreciates as a result of the lack of demand.
What has caused the sudden sell-off of our bonds and stocks over the past few weeks has been the tapering of quantitative easing in the United States, which began in December 2013. (Quantitative easing is the increase of money supply by flooding financial institutions with capital, in an effort to promote lending and liquidity.)
The availability of cheap money in the world’s biggest economy is slowly dwindling, which is resulting in less money being available to invest elsewhere, i e South Africa.
- Fin24
* This guest post is by Jason Elley, founder and owner of Commercial Space. Views expressed are his own.
Commercial property finance comes with an interest rate attached, and this is the fee that the bank imposes on you for borrowing their money for your purchase. Your initial loan amount for the property you choose to purchase is referred to as the original capital balance.
Once the interest rate is added to it, the total loan amount is settled on.
When buying property, the prime Interest rate is used to dictate what your interest rate is. Whether it is higher or lower than the prime interest rate will depend on the following few factors:
• Your credit profile;
• The total value of your loan; and
• The loan period requested.
At the end of each month, your interest rate is recalculated on the value of the loan remaining. This is the main way in which the interest rate can affect your loan, especially for your commercial property.
Commercial property is usually paid off over a longer period than other loan types, and those who choose to take the maximum loan repayment period will suffer from the effects of the interest rate over the years. In order to keep your loan amount low so that it can be quickly paid off, you need to ensure that your repayment period is kept as short as possible.
When shopping around to find the right property for you, you should take the total loan amount into account and use a bond calculator or similar to calculate the monthly rate, interest rate and so on. It is always a good idea to speak to an impartial adviser to find out how the interest rate can affect your commercial property loan.
Are interest rates going to go up again? Is this the start of an upward cycle?
When trying to determine whether interest rates will go up, one merely needs to look at inflation and see what this is doing. Rule of thumb is that as inflation rises, interest rates are likely to rise as well. Why is this the case, you might ask, or rather, what is the correlation between inflation and interest rates?
Let me explain this by using an example.
Let’s say you lend a friend some money today and he/she agrees to pay you back in eight years. By that time, the price for everything would have gone up, right?
So the money you lent him/her will be able to buy you more things today than it would in 2022 when he/she repays your money. To make up for that loss in the value of the money, you charge him/her interest.
What this means: interest protects you against future inflation rises
What inflation does over the next few months will therefore have a direct impact on interest rates.
To be honest, with the cost of petrol being the highest it’s ever been and a huge shortage in our maize supply as a result of severe drought up north (maize is a valuable food source for farmers to feed their cattle, sheep, chickens and so on), I can only see inflation going up before it starts coming down.
Please, do take heed of this before opening yourself up to more debt. Consult with an expert on an accurate lending plan before acquiring any substantial property. Be prepared for further interest rate increases of another potential 1% throughout this year.
But as mentioned above, this is completely dependent on what happens with inflation and if it starts to spike, then an increase of more than 1% over 2014 is very possible.
Rand depreciation: why, and what has caused it?
The rand has depreciated 40% since 2011. Very simply put, one of the main reasons for the depreciation is mainly due to the lack of demand in our local bonds and stock market.
Our market depends heavily on foreign investors buying our bonds and stocks and when a sell-off takes place due to some or other reason, the rand depreciates as a result of the lack of demand.
What has caused the sudden sell-off of our bonds and stocks over the past few weeks has been the tapering of quantitative easing in the United States, which began in December 2013. (Quantitative easing is the increase of money supply by flooding financial institutions with capital, in an effort to promote lending and liquidity.)
The availability of cheap money in the world’s biggest economy is slowly dwindling, which is resulting in less money being available to invest elsewhere, i e South Africa.
- Fin24
* This guest post is by Jason Elley, founder and owner of Commercial Space. Views expressed are his own.
