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A very basic explanation of balloon payments
Finance

A very basic explanation of balloon payments

August 19, 2022
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A balloon payment is a lump sum payment that is due to the bank/loan provider at the end of the loan term.

 According to the National Credit Act, a balloon payment can be offered to any consumer on an instalment sale agreement.

What most people forget is that even though the balloon payment is set aside, it remains part of your finance agreement and is payable by you. 

Does the balloon payment set aside accrue any interest? 

Usually, the interest is calculated on the full loan amount inclusive of the balloon payment. 

How does the balloon payment reduce my monthly instalments? 

Monthly instalments are calculated based on the total loan amount less the balloon payment which tends to reduces the monthly instalments. Loan amount is N$300 000 and your balloon payment is N$90 000, your instalment is based onN$210 000. 

What happens when the balloon payment is due? 

Most banks will notify before the balloon amount is due to give you time to consider your options. You generally have 3 options:

1) Pay the full balloon amount

2) Refinance the balloon amount

3) Sell or trade in the vehicle

Pay the full balloon amount 

If your balloon payment was say N$90 000 (30% of N$300 000), you will need to pay this up front. 

You need to plan around this. Where will you get the N$90 000?  Will you save for this monthly before it’s due? Will you use your bonuses?

 Refinance the balloon amount 

With this, you enter into a new loan agreement. Back to the N$90 000, you will need to finance this like it’s a new car at a different interest rate depending on your creditworthiness over maybe 12, 24, 36 or 48 et al months. 

Sell or trade in the car 

You can sell the car and use the proceeds to settle the outstanding amount, including the balloon payment. Well, this is if you get a good deal. Most car depreciate at the speed of light and you might sell for less than what you still owe plus the balloon. 

The total cost of credit after all is said and done is usually higher for a financing option that has a balloon payment vs that without a ballon payment. Your joy is only experienced with a reduced instalment. 

Make sure you read the instalment sale agreement with a fine-tooth comb so that you know whose who in the zoo. 

Wesbank has previously reported that on average 1 in every 5 funding agreements now includes a balloon payment that comprises on average 17% of the finance amount. 

*By BankerX, a technology company solving urgent economic problems through a connective platform disrupting traditional methods of career development, financial education, and access to capital.

 

 

How to factor in the rising repo rate when buying or selling property
Property

How to factor in the rising repo rate when buying or selling property

August 19, 2022
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The Monetary Policy Committee (MPC) of the Bank of Namibia has decided to increase the Repo rate once again by a whopping 75 basis points to 5.50% from 4.75% in the meeting held on 17 August 2022.

City of Windhoek extends Acting CEO’s term
Companies

City of Windhoek extends Acting CEO’s term

August 19, 2022
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The City of Windhoek has extended the term of O'Brien Hekandjo as Acting Chief Executive Officer by three months.

NAC calls for revival of national airline
Companies

NAC calls for revival of national airline

August 18, 2022
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The Namibia Airports Company (NAC) has called for the establishment of a new sustainable national airline.

Kazera to ramp up tantalum, lithium production after getting N$8.4m from Chinese investor
Mining

Kazera to ramp up tantalum, lithium production after getting N$8.4m from Chinese investor

August 18, 2022
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Kazera Global, which owns Tantalite Valley Mine in Namibia, says it is ready to increase production of tantalum and lithium after it received N$8.4 million from Chinese company Hebei Xinjian Construction.

Letshego low-cost housing scheme to benefit Namibians
Finance

Letshego low-cost housing scheme to benefit Namibians

August 18, 2022
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Pan-African Finance Group Letshego has launched a low-cost housing scheme for Namibia and Botswana with plans to roll it out to other African countries.

What would the corporate world look like if female communicators use their innate abilities effectively?
Companies

What would the corporate world look like if female communicators use their innate abilities effectively?

August 18, 2022
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Since this is Women’s Month, I have decided to highlight the pivotal role that women in my profession contribute to the corporate world.

BoN makes senior appointment
Finance

BoN makes senior appointment

August 18, 2022
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The Bank of Namibia has appointed Lloyd Londt  to the position of Finance and Administration Director and member of the central bank's senior management team.

Martin Inkumbi to exit DBN
Finance

Martin Inkumbi to exit DBN

August 18, 2022
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Development Bank of Namibia (DBN) Chief Executive Officer, Martin Inkumbi is set to step down from his role in August 2023, at the end of his current second five-year tenure.

Another 100bps hike expected by year-end
Finance

Another 100bps hike expected by year-end

August 17, 2022
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The Bank of Namibia (BoN) is expected to increase interest rates by another 100 basis points before the end of the year, analysts have said.

This is after the apex bank’s Monetary Policy Committee (MPC) resolved to increase the Repo rate by 75 basis points to 5.50% from 4.75 at its bi-monthly meeting on the 15th and 16th of August 2022.

"The decision was taken with due consideration of the persistent inflationary pressures and is deemed appropriate to safeguard the one-to-one link between the Namibia Dollar and the South African Rand, while meeting the country’s international financial obligations. Moreover, the adopted monetary policy stance is necessary to narrow the current negative real policy interest rate," BoN Deputy Governor Ebson Uanguta said on Wednesday.

He said policy stance was consistent with that taken by central banks around the globe, and in the region, with policymakers acting with resolve to slow and eventually reverse the current acceleration in inflation.

"The MPC will continue to monitor these developments and their potential effects on the domestic economy and will act appropriately and in line with its mandate to ensure price stability in the interest of sustainable economic growth and the development of the country," said Uanguta.

Simonis Storm Economist Theo Klein said the hike was in line with expectations and follows a similar move by the South African Reserve Bank which also hiked its Repo rate by 75 basis points in July 2022.

"The forward rate agreement curve in South Africa which summarizes market participants expectations of short-term interest rates, so we expect another 100 basis points hike before the end of the year if it materializes in South Africa,” he said.

With Namibia's current rate at 5.50 %, he said “this depicts that interest rates are getting closer to the pre-pandemic levels when the repo rate was at 6.2 % in February 2020.”

Klein said once a 100-basis point hike is announced, the rate will surpass the pre-pandemic levels.

"Interest are still being hiked in South Africa and Namibia although inflation is driven by supply side factors which interest rates have no control over and this is primarily for two main reasons, which is central banks trying to limit the currency weakness and itself is inflation thus through this insect way they are attempting to contain inflation, and secondly they want to keep inflation expectations anchored around their target.

“In South Africa, this is between 3% and 6%, so to keep inflation expectations anchored the central bank will hike the interest rates to try and signal to the market that the high levels of inflation are unlikely to persist in the medium to long term.”

The Economist added that inflation expectations need to be managed and anchored around the central bank’s target.

“This is because when expectations move higher and employees demand higher salaries this will lead to higher prices and inflation rates, as business need to pay these higher salaries, thus through this channel central banks use hiking rates to signal to the market that long term inflation is likely to gravitate towards its target range so that inflation expectations are managed and anchored around the central banks targets range," said Klein

Through these indirect effects he said the central bank in SA is trying to contain inflation and with the NAD and Rand peg, BoN has to follow suit.

Danie van Wyk, the Head of Research at IJG Securities concurred another rate hike was expected from BoN.

“The exact number- and size of any further rate hikes will depend on the inflation data released over the next couple of months, and particularly the magnitude of the second-round effects from rising fuel prices. We currently expect a 50 bp rate hike at the SARB’s September MPC meeting followed by a 25 bp hike at the November meeting, although there is always the possibility that they could be combined into another 75 bp rate hike in September instead,” he said.

Van Wyk added that while inflation continues to be driven more by supply-side factors than increased consumer spending, the SARB is front-loading rate increases, opting to stay ahead of central banks in developed nations, and reinforcing its commitment to anchoring inflation expectations.

“By not following developed market central banks in raising rates, South Africa is likely to see an outflow of capital which will weaken the rand, which is in turn inflationary and will just exacerbate the increase in inflation. The BoN’s mandate is to protect the currency peg with the South African rand, thereby anchoring domestic inflation expectations,” he said.

Rodney Hoaeb, an Economic Researcher with Harvest Investment, said the increase in the repo rate to 5.5% in the current economic times presents a scenario where governments are doing their utmost best to avoid the fears of recession asserted by high inflation rate and poor production levels.

"The cost of production is very high; interest rates are high, and this discourages people from spending on too much disposable goods considering the high level of food inflation.  The counter-reactionary move gives banks the comfort to retain expected returns on economic recovery," he explained.

Hoaeb said the external impact was also caused by China and US tensions where the US is fearing recession, EU member states are avoiding recession because of drought and reduced gas supply from Russia.

Reportedly China has reduced their commitment to US bonds as a retaliation against its support for Taiwan.

Thus, Hoaeb noted that one of the core things to tackle in Namibia will be to find ways to reduce government expenditure on imports.

"Government should find strategies to spend locally and ensure the money remains in the economy and stimulate growth. Secondly, the Government should reduce debt both international and domestic to stabilize the fiscal position and for confidence," he said.

The researcher further urged the Government Institutions Pension Fund to expedite the funding for infrastructure projects and various sectors in order to retain jobs and stimulate more growth.

"The GIPF has been withdrawn because of its selection process for unlisted investment; this was an economic setback in various sectors," Hoaeb said.

The next meeting of the central bank’s MPC will be held on the 24th and 25th of October 2022.

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