The South African Reserve Bank is almost guaranteed to increase the repo rate in two weeks’ time, meaning that homeowners will have to pay higher bond repayments from the end of January.
Just how much more you will need to fork out will obviously depend on the value of your loan and the basis point increase that the Monetary Policy Committee agrees on.
Property experts and economists firmly believe that the repo rate will be increased as the SARB fights to curb inflation, but there is not yet any consensus on what the hike will be.
The best-case scenario prediction is an increase of 0.25% while the worst-case scenario would be a 0.75% hike. Some experts feel that the repo rate will be raised by 0.5%.
The current repo rate is 7%, which puts the prime lending rate at 10.5%. FNB property economist John Loos explains that the repo rate – the rate at which the SARB lends money to the commercial banks, dictates the prime lending rate – the rate that consumers are charged when borrowing money.
“The prime lending rates of the major banks are almost always set at 3.5% above the repo rate. It does not have to be this way but has been for over 20 years. So when the repo rate goes up or down, the prime lending rate, which in turn affects consumers directly, does too.”
There is a few days’ lag between the repo rate adjustments and the corresponding adjustments in prime by commercial banks, he adds.
“As a homeowner you can watch both rates in tandem, but your home loan repayment will ultimately be affected by the change in your bank’s prime lending rate, if your floating interest rate is linked to prime.”
Financial professionals always advise homeowners and buyers to keep track of the interest rate cycle and take possible increases into account when budgeting. This month, the increase could range from 0.25% to 0.75%, so it is best that you consider all three outcomes.
To assist with your end-of-the-month budget, IOL has drawn up the following table based on a range of home loan values and the possible increases.
During an upwards interest rate cycle, Carl Coetzee, chief executive of BetterBond, advises homeowners to budget prudently and 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 homeowners looking to buy their own home.”
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