Homeowners should brace themselves for another interest rate increase this month

Property owners in South Africa may have to pay extra on their house loan instalments at the end of this month, as the repo rate is expected to rise again.

The best-case scenario forecast predicts a 0.25% rise, while the worst-case scenario predicts a 0.75% increase.

The present interest rate of 10.5% will be raised to between 10.75% and 11.25%.

The good news is that FNB senior economist Koketso Mano believes the impending rate hike would be the last in this cycle.

“The Monetary Policy Committee (MPC) will then evaluate the impact of monetary tightening since November 2021, when the repo rate was at an historic low of 3.5%”, and the prime lending rate at 7%.

He claims that if the repo rate is raised by 0.5%, interest rates would be a full percentage point higher by the end of 2019. The repo rate hike will be caused by advanced nations continuing to tighten their rates, placing upward pressure on South Africa’s rates.

Another promising prospect is that the repo rate would only be raised by 0.25%, as predicted by Absa. Absa Home Loans managing executive Nondumiso Ncapai says the bank has reduced its prior prediction of a 0.5% increase to 0.25%. This raises the prime loan rate to 10.75%.

“We believe positive developments since the South African Reserve Bank’s (SARB) MPC meeting in November, such as below-consensus inflation releases, a stable rand, falling energy and grain prices, and some evidence of moderation in global inflationary pressures, may bring about a more moderate hike. However, there is likely to be a diversity of views within the MPC about how it should approach this stage of its hiking cycle, which means a high degree of uncertainty concerning the outcome remains.”

While BetterBond CEO Carl Coetzee expects for a “more conservative” hike this month, he argues the current inflation rate of 7% is still beyond the target range.

According to Reuters and the Bureau of Economic Research, a 0.5% hike in January will raise the prime lending rate to 11%.

“While a 0.25% increase would be far more comfortable for consumers coming out of the festive season, it’s likely that the Reserve Bank will maintain its strong approach to curbing inflation by opting for a more substantial increase, albeit not as aggressive as the increases seen in September and November 2022.”

On the plus side, Coetzee explains that Reserve Bank Governor Lesetja Kganyago “did indicate in December last year that inflation was expected to slow, and once this happens, we should see interest rates start to normalise”.

“This means the repo rate could hold steady at 7.5%, with a likelihood of a gradual decrease towards the end of 2023 or in early 2024 depending on inflation.”

According to Leonard Kondowe, national manager for Rawson Property Finance, the interest rate should stay constant to offer clients some breathing room. However, he predicts that it will rise by another 0.25% to 0.5%. This is because inflation became a problem “almost overnight” as a result of issues such as the ongoing electrical crisis and the Ukraine war.

“The SARB is forced to implement a much steeper interest rate increase than had been forecast in an effort to curb runaway inflation. Interest rates are unlikely to decrease any time soon.”

According to Paul Stevens, CEO of Just Property, the MPC “continues to act responsibly in an effort to curb inflation,” thus he anticipates the interest rate to be raised by 0.5% or 0.75%. Unfortunately, this will frighten purchasers.

As a result, he anticipates not only the property market to decline further, but also property price inflation to remain moderate for both buy and rental rates.

“Buyers will need to ensure that they take into account potential future increases in interest rates – and hopefully the worst-case scenario is 1% over the next year. This impact will be felt more at the lower end of the market than at the top.”

While he does not anticipate to witness a property crisis, Stevens argues that “we are heading into a tougher trading environment”.

“Despite interest-rate hikes, the lending environment is still good, with interest rates not being excessively high and banks still aggressively loaning up to 110% of the value of the property to the right buyers.”

When interest rates rise, homeowners are more likely to face financial difficulties since their debt payments will rise as well, if the loan is repaid at a variable rate, according to Ncapai.

“We advise homeowners to manage their budgets closely and reduce luxury spending. This is a good time to go through bank statements to check for subscriptions that may not be needed.

“We also encourage homeowners who find themselves in financial difficulty to approach their banks for guidance on the range of options they may explore proactively to manage their credit obligations.”

Mano agrees, predicting that consumer spending would remain under pressure as rising living costs hinder wage growth. Debt payment costs are increasing, and people with tighter budgets should feel more limited.

“As the year progresses, slower economic growth may dampen the employment recovery while potentially softening earnings growth, but softer price growth should provide some respite.”

According to Angela Glover, head of FNB home and structured lending solutions, the interest rates on most credit facilities, including house loans, are tied to the prime lending rate, which means that if the rate rises, so will the interest paid on your home loan.

“This means that your monthly repayment will be increased as the repo rate and prime lending rate increase…Customers who are struggling to keep up with the increased repayments can get in touch with their bank to find out what solutions we have available to help them manage their home loan.

Stevens advises purchasers that homes in new developments can be acquired with no transfer charges, resulting in the lowest cost of acquisition.

“There is a great opportunity to save thousands of Rands when buying into high-quality developments.”

Financial advice

According to Kondowe, customers have “proven very resilient,” and their faith in real estate as an investment remains high. His advise to people joining the housing market this year is to not overextend their affordability.

“Make sure that you are pre-qualified and know exactly what you can afford. Consider saving up for a deposit for the property that you want as a sizeable deposit can make a world of difference to the long-term affordability of your home. So tightening your belt for a few months could be an extremely wise decision.

“Prepare to budget accordingly by giving yourself enough room to comfortably adapt to the slight increases in your bond repayments due to the rising interest rates.”

Buyers should also conduct research and contact with local property specialists before making a purchase choice. The same is true for homeowners.

“Existing homeowners should focus on reducing unnecessary spending and making their bond repayments their financial priority. Putting extra income, like year-end bonuses, straight into your home loan can deliver some incredible long-term savings.”

Coetzee urges homeowners to budget carefully and pay more into their bonds if they have the financial wherewithal to do so during an upward interest rate cycle. This will act as a cushion against future interest rate hikes.

“Now is not the time to accumulate additional credit, so homeowners should desist from taking any further loans that could add financial strain.”

Although the next several months may be difficult as homeowners feel the pain not just with their mortgage but also with rising energy and gasoline bills, he thinks the country is reaching the pinnacle of the rates cycle.

“Furthermore, a home is a long-term investment that provides financial security for the future. While we do expect some slowing of buyer activity, particularly at the lower end of the market, there are still opportunities for those looking to buy their own homes.”