South African property owners will have to fork out more on their home loan repayments at the end of this month as the repo rate looks set to increase again.
Best-case scenario predictions are that the hike will be 0.25%, while worst-case scenario expectations are leaning towards a 0.75% increase.
This will push the current interest rate of 10.5% to between 10.75% and 11.25%.
The good news though, is that FNB senior economist Koketso Mano expects the upcoming increase to be the last in the current 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%.
If the repo rate is increased by 0.5%, he says interest rates would be a full percentage point above end-2019 levels. The repo rate increase will be a result of advanced economies still tightening their rates, which is putting upward pressure on South Africa’s rates.
Another positive possibility is that the repo rate will only be increased by 0.25% – a figure that Absa is predicting. Nondumiso Ncapai, managing executive at Absa Home Loans says the Bank has trimmed its previous forecast of a 0.5% hike to 0.25%. This will bring the prime lending 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 chief executive Carl Coetzee hopes that an increase this month will be “more conservative”, he says the current inflation rate of 7% is still outside of the range target.
Reuters and the Bureau for Economic Research expect an increase of 0.5% in January to push up the prime lending rate to 11%, he says.
“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.”
Ideally, the interest rate will remain unchanged and give consumers some breathing room, says Leonard Kondowe, national manager for Rawson Property Finance. But the reality is that it will increase by another 0.25% to 0.5%, he believes. This is due to inflation becoming a challenge “almost overnight” as a result of factors such as the ongoing electricity crisis and the war in Ukraine.
“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.”
Paul Stevens, chief executive of Just Property, notes that the MPC “continues to act responsibly in an effort to curb inflation”, and thus, he expects the interest rate to be increased by either 0.5% or 0.75%. Unfortunately, this will make buyers nervous.
As a result, he not only expects the property market to slow further, but property price inflation to continue being slow for both purchase prices 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 expect to see a property crash, Stevens states 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.”
Pressure on homeowners, buyers
When interest rates increase, homeowners are likely to come under increasing financial pressure as installments on their debt obligations will increase too, if the debt is payable on a variable rate, Ncapai explains.
“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.”
Echoing this, Mano says consumer spending will continue to come under pressure as a higher cost of living has undermined wage growth. The cost of servicing debt is rising and households with tighter budgets should feel more constrained.
“As the year progresses, slower economic growth could dampen the recovery in employment while potentially softening earnings growth, but some reprieve should be provided by softer price growth.”
Angela Glover, head of FNB home and structured lending solutions, explains that the interest rates on most credit facilities, including home loans, are linked to the prime lending rate, meaning that, as the rate increases, the interest charged on your home loan will increase too.
“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.
Offering advice to buyers, Stevens says properties in new developments can be purchased with no transfer costs, thereby offering the lowest cost of acquisition.
“There is a great opportunity to save thousands of Rands when buying into high-quality developments.”
Money advice
Kondowe says consumers have “proven very resilient” and their confidence in property as an investment remains strong. His advice for those entering the property market this year is to not push your affordability levels.
“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 do their research and consult with property experts in their areas to make informed property decisions. The same goes 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.”
During such an upwards interest rate cycle, Coetzee advises homeowners to budget prudently and to pay extra into their bonds if they have the financial means to do so. This will provide some buffer against further interest rate increases.
“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 few months may be challenging as homeowners feel the pinch – not just with their bond but with rising electricity and fuel costs, he says there is the assurance that the country is nearing the peak 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.”
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