Real Estate Investor Magazine South Africa May 2014 | Page 30

SMART MOVES

BY KOOS DU TOIT

Financial Perspectives

The impact of interest rates for buy-to-let properties

W

hile gearing – borrowing money in the
form of a home loan or mortgage bond
to acquire an income-generating asset
– significantly increases the return on investment
of a buy-to-let property, the interest rate at which
the home loan or mortgage bond is obtained has a
significant impact, as it affects the biggest monthly
expense: the bond repayments.
Using the P3 Property Wealth Manager software, the
impact of an interest rate of 10% and an interest rate of
12% on a R450 000 property, acquired for with a 100%
bond over 20 years, becomes clear.

VARIABLE

INTEREST RATE 10%

INTEREST RATE 12%

Monthly bond repayment R4 343
R1 148

R1 760

Breakeven

4th year

It is no surprise then that the interest rate has a
massive impact on the return on investment, as
illustrated below.

R4 995

Monthly shortfall (Year 1)

However, interest rates also have a signif icant
impact on return on investment. The P3 Property
Wealth Manager software instantly calculates the
interest payable on a mortgage bond over the period
of the bond when the variables of a potential buyto-let property are entered. Using the same example
as above (R450 000 bond over 20 years), the interest
payable over the 20 year period will amount to
R 592 223 at an interest rate of 10%, and to a
whopping R739 173 at an interest rate of 12%! In
both cases, the interest payable is more than the
original purchase price of the property.

5th year

ROI
Year 1

28

May 2014 SA Real Estate Investor

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326% pa

213%

Year 20
The higher interest rate not only results in a
higher monthly bond repayment, it also increases
the monthly shortfall (the amount the investor
pays out of his/ her pocket until the proper t y
reaches breakeven) and the period of time before
the property breaks even (when the monthly rental
income covers all the monthly expenses and the
shortfall is eliminated).

INTEREST RATE 10% INTEREST RATE 12%

688% pa

315% pa

Managing the risks
Since an increase in the interest rate impacts both the
monthly bond repayments and the monthly shortfall,
an interest rate increase is one of the greatest risks
faced by buy-to-let investors.

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