Know what you can afford as interest rates rise

Know what you can afford as interest rates rise

Having not only survived but thrived during the pandemic, South Africa's property market has proven to be a sound investment option, especially during challenging times.

So as consumers prepare for another repo rate hike this month, it's important to note that even if it climbs by 50 basis points to take the prime lending rate to 8.75%, this is still well below the 10% it was before the pandemic, says Carl Coetzee, CEO of BetterBond. "There are still opportunities for aspirant buyers and investors, notwithstanding the challenging prevailing economic conditions," he says.

"There is no denying that times are tough. The ongoing Ukraine conflict is having an impact on oil and fuel prices and electricity prices have soared. This as Eskom escalates its load shedding schedule, disrupting businesses with a significant impact on an economy recovering from Covid." South African Reserve Bank Governor Lesetja Kganyago has gone on record to say that a hike of 25 or 50 basis points is "not off the table" and economists at BNP Paribas have cautioned that we could even see a 75 basis point hike, which would take the prime lending rate to 9%. "Affordability is always a consideration when buying a home, especially in the face of rising interest rates," says Coetzee.

Below is an indication of how a 25 and 50 basis point repo rate hike will change your monthly bond repayments:

Bond amountCurrent bond payment with prime at 8.25%Monthly bond payment if repo goes up 0.25% and prime is at 8.5%Monthly bond payment if repo goes up 0,5% and prime is at 8.75%

But, the prime lending rate will still be in single digits, and this does give homeowners an opportunity to invest in property as a long-term investment. BetterBond has seen an almost 7% increase in the ratio of formally granted bonds for June year-on-year, which is significant coming off the high base set last year, says Coetzee. "While the honeymoon period for first-time buyers seen in June 2021, shortly after the lifting of lockdown restrictions as the interest rate dropped to a record low, has moderated, BetterBond has seen a marked increase in bond applications for homes of R3 million and more."

Application volumes in this price band have risen by 31,76% year-on-year for June, suggesting that repeat buyers are still benefiting from the single digit interest rate. Similarly, bond applications for homes of between R2.5 million and R3 million have increased by almost 19% for the same period, says Coetzee. This substantiates the view posited by Absa at a recent stakeholder presentation that much of the current buyer activity is from second-time buyers and investors looking to buy to let."Although first-time buyer activity has slowed, partly because of inflationary pressures and rising living costs, BetterBond has seen a 5,37% increase in the ratio of formally granted bonds to these buyers."

According to Absa, homeowner sentiment suggests that the property market remains robust despite the economic headwinds. Sales Leader for Absa, Ian Lamprecht said during the recent presentation that 78% of respondents still think it is a good time to invest in or buy property. A positive sign for the long-term sustainability of the property market is that there is plenty of movement, with people buying and selling to adapt to their changing needs, he added. The FNB Estate Agent Survey for the first quarter of 2022 put the average time on the market at eight weeks, well below the 14 weeks it was in 2008 during the global financial crisis

"Semigration numbers are also up, with buyers relocating to be closer to family or to return to where they work as their employment conditions change," says Coetzee. House price growth has slowed since early 2021 and national house price inflation is currently at 4.46%, according to Lightstone, creating opportunities for buyers to invest in property while the prime lending rate is below 10%. "This buyer activity is reflected in the year-on-year increase in BetterBond's Deeds Office bond registrations for April," says Coetzee.k

Irrespective of the outcome of this month's Monetary Policy Committee meeting, the message is clear: consumers need to look at their monthly expenses and what they can afford as interest rates start to climb, says Coetzee. "Those who have the financial means to do so are advised to pay extra into their bond, if they can, to reduce the amount of interest payable over the whole loan period. Create a savings buffer so that you have the financial reserves to manage rising prices - fuel, food and bond repayments - if necessary. Look at your household budget and cut costs to reduce monthly expenses." If you are considering buying a new home, work with a bond originator who can apply to more than one bank on your behalf to negotiate a rate concession that will offset repo rate increases, he adds.

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