Question:
I am 22 years old, halfway through an UNISA B.Com degree and currently earn R200 000 per annum — approximately R14 500 each month after tax and other deductions. I share a place that I rent for approximately R3000 per month.

I purchased a small, one bedroom flat in Braamfontein, Johannesburg for R460 000 with the intention of renting it out for investment purposes (Bridgeview). The deposit was R15 000, paid in September last year. The flat is due for occupation in November 2008.

My bond originator has secured a rate of prime less 1.2 percent with Absa, my bank for the past five years. I received this offer — the best of all the banks — in March this year.

I have never been insolvent, had any debt counselling or any of that. My credit record is perfect.

Now that even more huge increases in interest rates are imminent, would it be a better option for me to get out of this investment as soon as possible and sell my flat or to weather the storm?

Also, I am dissatisfied with the interest rate offer that I received. What options do I have available? May I speak to the Absa myself?

Lastly, is a fixed interest rate an option available to me and is it worth considering?

I have raised quite a few questions and I hope that you’ll be able to shed some light on my situation. Thank you for your time.

Answer:
The interest rate you received from Absa is not bad considering your age and perhaps your short (or even non-existent) track record with them.

The bond originator will probably not be too excited about you negotiating directly with Absa as they did the leg work for the application. You need to read the agreement you signed to see if they place limitations on you in this regard. Remember that they take a percentage of the rate as a fee. If there are no restrictions on you in terms of the application with the bond originator you could contact Absa to try and negotiate a better deal.

In terms of your property investment, if you have not taken transfer then you will not be allowed to on-sell the property but will have to wait until it is registered in your name.

Rentals you can expect from the flat will not cover your bond repayment so you will probably have to subsidise to a large extent. However, the people that are selling homes in order to escape high interest rates must live somewhere so you will probably see better yields in rental properties towards the end of the year.

Banks are reporting rapidly falling house prices so there is a risk that if you try and sell now you may not get the price you want. It is, in fact, unrealistic to turn a profit in a brand new purchase, even in buoyant markets.

So you need to do the maths — let’s say you can get a rental of R3000 per month you will have to subsidise the rental to the tune of R2800 per month. In one year you will have paid R33 000. Ask your agent what they predict you can sell your flat for and compare.

In the long run, weathering the storm is probably the way to go if you have the cash flow to sustain the payments. At least the money is being invested in an appreciating asset.

Property prices are cyclical and no doubt there will be an improvement in the markets when rates stabilise or fall.

Just don’t take on any new debt. You could limit your shortfall by moving into the flat yourself and sharing with a roommate whom you could charge R2500.

With regards to fixing the rate — yes, you can ask for a fixed rate, but it will probably be two percent more than what you can get on a variable rate. If you are worried that the pending 1.5 percent interest rate hike (we had a 0.5 percent increase yesterday) is going to push you over the edge then you will be putting yourself there already by fixing your rate.

However, if you can cope with an additional two percent — but no more — then fixing the rate may be a good idea for your peace of mind. Bear in mind though that experts believe people do better on variable rates in the long term. It’s all down to your particular risk profile.