Home owners and those hoping to still get onto the property ladder will have to really cut back on their spending in order to keep up with their bond repayments.
This after the interest rate – albeit expectedly, was hiked by 25 basis points this afternoon to 4.25%, and the prime lending rate to 7.75%.
Although this latest increase may only add a few hundred rand to some home owners’ monthly bond repayments, those hundreds could add up to thousands over the next year, and the reality is that the hikes are likely to continue growing over the coming months.
BetterBond calculations reveal that with the previous prime lending rate of 7.5%, the monthly repayment on a R1m home – taken over a 20-year period – was R8 056, but now these home owners will be paying R8 209 a month (R153 more). And of course, the more expensive the home, the more you will pay each month.
If your home cost R2m, you would have paid R16 112 last month. From now though, until the next interest rate decision, you will be paying R16 419 (R307 more). And if you are the owner of a R3m home, your monthly bond repayment will climb from R24 168 to R24 628 (R460 more).
Similarly, BetterBond reveals, monthly bond repayments on these home prices will see higher rises:
- R4m bond repayment will increase from R32 224 to R32 838 (R614 more)
- R5m bond repayment will increase from R40 280 to R41 047 (R767 more)
- R6m bond repayment will increase from R48 336 to R49 257 (921 more)
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Yet although the rise in the prime lending rate will have an impact on your monthly bond payments, BetterBond chief executive Carl Coetzee says the increases that have been forecast by the South African Reserve Bank for the next three years are “gradual” and the prime lending rate “should only hit double digits in 2024”.
“This means that there is still time to make the most of the accommodative lending environment.”
Just Property chief executive Paul Stevens suggests that home loan holders use a repayment calculator to see how their payments are likely to change, and then to prepare for increases.
"Bond repayment calculators can help you practically understand what increases in interest rates will have on your affordability.”
Furthermore, with interest rates likely to rise over the next few years, home owners who haven’t looked over their bond commitments should do so, advises both Stevens and Coetzee.
If I fix my interest rate will that protect me from the increases?
In light of the expected ongoing increases, Coetzee says home owners could choose to fix their interest rates, explaining that home loans are awarded by default on the basis of a variable interest rate.
“Only once your bond has been registered can you apply for a fixed interest rate and there is a strict time limit attached before the offer lapses.”
However, while market conditions are always a useful guide, he says “the most important factor when deciding on whether to fix the interest rate or not should be affordability”.
Stevens notes that, right now, a fixed interest rate will “almost certainly be higher” than a variable rate so you should rather get indicative proposals from the lending institutions.
“If you are applying for a bond, comparing fixed versus variable interest rate options is a worthwhile exercise. From there, you can apply the options to your appetite for risk/ uncertainty and future prospects.”
Coetzee agrees: “Generally, a fixed interest rate is higher than a variable rate as it poses more of a risk to the bank. It is only negotiated at the time of bond registration and the rate offered is dependent on the going rate at that specific time.”
Time for property owners – and consumers in general – to watch their spending
Sadly, says Adrian Goslett, regional director and chief executive of RE/MAX of Southern Africa, South Africans will have to tighten their belts over the next few months.
“Rising fuel and food costs, as well as higher debt repayments resulting from the latest interest rate hike, will undoubtedly put pressure on household budgets.”
However, he still does not believe that this is all bad news for the country’s outlook.
“South Africa could be poised for growth if it positions itself well to fill the gaps in the global supply/demand chain. Exports already increased by 8.5% in the fourth quarter of 2021 and this stands to increase further in 2022 if the correct opportunities are seized.”
Goslett says the South African housing market also poses an appealing option for foreign investors who wish to diversify their portfolios to limit risk in an increasingly risky global economy. For foreign investors, he says the country’s market market offers “incredible value for money”, especially within the luxury markets.
“It would be beneficial to South Africans if more foreigners invest in the local real estate market as this would plough money back into the local economy and help stimulate growth in all related industries at a time when our country needs it most.”
Marcél du Toit, chief executive of Leadhome says the South African Reserve Bank’s decision to increase the interest rate by 25 basis points will come as a disappointment to consumers and a “blow to momentum” in the South African property market.
“The impact of the war between Russia and Ukraine is already having an obvious negative impact on South Africans as the cost of food, petrol, oil and electricity is set to rise significantly over the next three months. This means that less South Africans will be able to cope with high interest rates, weighing on their ability to afford bond repayments.”
If this trend continues, he encourages aspiring home owners to view this period as a “small window of opportunity”, if they are keen to take advantage of relatively low interest rates, before further increases.
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