I am probably writing this article at a time when many people across the country are going through a very difficult time financially.
The Reserve Bank has just hiked the interest rate by 75 basis points – the sharpest increase since September 2002.
This means the repo rate or the rate at which the central bank lends money to banks is now 5.5 percent.
The prime lending rate used by banks when lending to the public now starts at about nine percent.
The year-on-year inflation figure for June jumped to to 7.4 percent, pushed by a sharp increase in food and fuel prices.
We all hate paying more on our bonds, but inflation is not all bad.
What it does is wipe out the value of debt.
Let me explain: if you buy a property today at five percent interest and have no inflation then you are paying five percent of the value of the property in interest each year.
That’s expensive money.
But have a 10 percent inflation rate and the value of the property increases by 10 percent per annum.
Your bond payment is only half of the value of the increase in the price of your property.
In other words, you are making five percent profit every year after the bond has been paid.
Remember when you sell, the bank does not share in your profit.
Because of inflation, the debt that you have at the bank is effectively dropping in value by five percent each year.
With inflation, your income should go up by the same amount too so your rental will have gone up by percent which means that you have five percent more income to pay off your bond.
I bought my house in 1975 for R18 000 – it is now worth R1.5-million.
While it is tough at the beginning, it is great at the end.
I borrowed R18 000 for an asset now worth R1.5-million.
- Mike Spencer is the founder and owner of Platinum Global. He is also a professional associated property valuer and consultant with work across the country as well as Eastern Europe and Australia.