Homeowners, brace yourselves: tomorrow’s interest rate hike – and therefore your bond repayments

The South African Reserve Bank (SARB) is largely expected to hike the repo rate by 0.25% tomorrow, taking the prime lending rate to 8% and leaving homeowners will higher monthly bond repayments.

And if this happens, property owners should count themselves lucky as there is growing speculation that the repo rate increase could be 0.5%, meaning the prime lending rate on their home loans will jump to 8.25%.

“We expect the SARB to hike the repo rate by 25 basis points (0.25%) on Thursday, but see an elevated risk of a 50 basis point (0.5%) move,” says Miyelani Maluleke, senior economist at Absa Corporate and Investment Banking.

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While the Bank sees further monetary policy tightening as “warranted”, it “firmly believes” that “aggressive rate hikes” are not appropriate.

“Governor Kganyago noted in the post-Monetary Policy Committee (MPC) media briefing in March that the SARB does not want to choke off South Africa’s nascent economic recovery. That said, we see the risks of a 50bp hike at this meeting as elevated, particularly due to the exchange rate movements since the last MPC meeting...

“Notably, analyst consensus has shifted towards a 50bp hike for this MPC meeting, with 16 of the 24 analysts polled by Thomson Reuters last week calling for a 50bp move, with the balance, including ourselves, forecasting a 25bp hike,” Maluleke says.

At the previous MPC meeting, two members preferred a 0.5% rise in the repo rate while three were in favour of the 0.25% increase.

FNB expects the SARB to “proceed cautiously” with 0.25% rate increments, but acknowledges in its Economics Weekly report, that the probability of a 0.5% hike tomorrow is “materially high”.

“Since the MPC meeting in March, our inflation forecast has increased from 5.6% to 6.0% for 2022 and from 4.5% to 5.0% for next year. Average inflation expectation two years ahead was 5.0% from the first quarter BER (Bureau for Economic Research) survey results. Arguably, this is what the two MPC members who preferred a 50bps hike gave a more significant weight to.

“Crucially, in just two meetings, the US Federal Reserve has cumulatively hiked by the same amount as the SARB – 75bps cumulatively.”

Carl Coetzee, chief executive of BetterBond has noted economist predictions that the repo rate could increase by 0.5%.

“It’s understandable that homeowners are concerned about the impact this will have on their bond repayments.

“Of course, the increase will mean a change in monthly repayments, and we encourage homeowners to factor this into their budget calculations.”

However, he notes that the country is “still in a far better position than we were in 2008 when the property market collapsed and inflation was at 11.5%”.

Furthermore, the recent increase in interest rates has not dampened the banks’ appetite to lend.

“BetterBond has seen an almost 10% increase in the ratio of formally granted bonds for April, year-on-year, which is significant coming off the high base set last year. With some banks offering loans of up to 105% for qualifying applicants, there are options for aspirant homeowners.”

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In calculations formulated by FNB property economist John Loos, this is how much more homeowners will pay on their home loans if the rate increase is in fact 0.5%.