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Johannesburg - Financial services provider Integer has launched a new product which works as "insurance" for bondholders against further increases in their monthly bond repayments, should interest rates move higher.
The Inter Cap offering allows a client to choose the level at which they want to cap their rate - either at the current bond rate or at an increase of 0.5%, 1.0, 1.5 and 2% over a one-, three- or five-year period.
Fixing interest rates on homeloans depends heavily on taking an educated view on the interest rate environment going forward.
In a research noted dated 30 June 2008, Standard Bank economists said they saw interest rates peaking toward the end of 2008 and then declining in 2009 and 2010. The Reserve Bank's monetary policy committee has raised the repo rate by 50 basis points 10 times since June 2006, pausing only in January 2008. The prime lending rate is now 15.5%
When looking at fixing the rate on your bond, it's important to weigh up the longer-term return.
To assess whether they make sense for you, you need to review your own financial position and make a judgement call on two issues:
1. Affording the monthly cap charge
If you are able to afford the R213 per month to cap your interest rate for the next two years, would you be better served by simply increasing your monthly installment?
Over the full term of the loan, you would ultimately come out ahead by upping your monthly payments, as you would have repaid a greater amount of the capital on the loan.
2. Interest on insurance
Remember that the insurance installment will be added to the capital value of the loan and this will also be subject to interest repayment.
"We offer home owners the option of financing the cap premium through their home loan, thereby eliminating the cash flow impact of buying the protection," says Integer CEO Simon Stockley.
"Clearly, like any re-advance on a home loan, interest would then be charged on the advanced amount, so the faster a home owner pays back the loan, the lower the interest payable on the re-advance."
Fixing your interest rate or taking out a "cap" against further interest rate increases will depend on your personal circumstances, but its main value to consumers will be peace of mind during times of severe interest rate moves, and ensuring the bondholder doesn't run into a cash-flow squeeze.
However, as with all loan agreements, you will be best served by paying the most capital and the least possible interest over the shortest period of time.
- Fin24.com