spate of advertisements in the local print media has made
it clear that prime lending rates are going up. So what exactly
is this prime rate?
What is commonly called the prime rate is a benchmark interest
rate for loans pegged to the rate at which banks borrow money.
Mortgage rates tend to be higher than the prime lending rate,
because banks make money from lending money. They therefore
charge the consumer more than they have to pay for money.
If the interest rate is going up, then the banks are paying
more for money. It would follow then that investors can expect
a higher rate of return on deposits, bonds etc. So, mortgage
rates will be higher than bond rates. Remember too that inflation
tends to follow interest rates.
Remember as well, that classically the term mortgage
refers to the agreement that gives the lender the right to
take possession of your property if you fail to make the requisite
Now, when interest rates are going up, is it the best time
to afford a mortgage loan? I think not! The best time is when
rates are low or dropping. But other things must be considered
Debt to income ratio, is the amount of money you owe in relation
to the amount you earn. If that ratio is too high, that is
not good. So reduce your debt before you apply for a mortgage.
If you can afford to pay a mortgage instalment of $3,000 per
month, and the rate is 14 per cent per annum, and if you are
prepared to pay for 30 years, you will qualify for about $350,000.
In addition to repaying the interest and principal, mortgage
expense computations include the rates and taxes that are
payable annually on the property, as well as the cost of property
A common error on the part of homeowners is that they purchase
insurance just enough to cover the mortgage loan. This is
commonly the stipulation of the lender. However, the home
cost includes the deposit, plus significant small sums of
cash that come out of discretionary
It follows then that if the property will cost $500,000, you
may borrow only $450,000, and take out only $450,000 in insurance.
Apart from that, the contents of the home need to be covered,
under a separate policy.
It will appear then that an appropriate insurance cover for
such a property may be closer to $600,000 with a contents
policy in the vicinity of $70,000.
The truth is that, once the homeowner moves into his new property,
there will be substantial purchases over the next five years,
as the drapery rods, the shower fixtures, and the light fixtures
Then too, there are landscaping costs, and fencing which could
be as much as $50,000, in the first instance.
There are few varieties of mortgages. The common type is the
fixed rate mortgage. This requires a fixed payment for the
duration. There is another variety called an adjustable rate
or a fixed/adjustable hybrid; another variety requires interest
payments only, in the first five years generally.
The common fixed rate mortgage is the most user-friendly and
the least strenuous. Consumers can be deceived by the apparent
ease of payments within other types. Remember that although
salaries do increase over the years, household expenses and
inflation also increase, and the ability to pay a higher instalment
in later years, may not be realised.
In final analysis, what you can afford to do in your new home
rests on a sliding scale, intricately tied in with the new
prime lending rates.