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Interest rate hiked by 0.5%: Homeowners, you should have seen this coming

Homeowners need to budget for ongoing rate hikes. Photo: Steve Buissinne/Pixabay

Homeowners need to budget for ongoing rate hikes. Photo: Steve Buissinne/Pixabay

Published May 19, 2022

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It was always expected that the repo rate would be increased after each Monetary Policy Committee (MPC) this year, but up until a week ago, no-one expected that the hike would be more than 0.25%.

Economists started seeing the signs of a possible 0.5% increase over the past few days but even they did not completely believe it would reach that point.

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But it did. And from tomorrow, the prime lending rate will increase to 8.25%, meaning homeowners will be forking out more on their home loan repayments.

Read our latest Property360 digital magazine below

Few expected the upswing to take such a sharp turn so early on, says Tony Clarke, managing director of the Rawson Property Group.

“We were hoping for a more moderate 25 basis point hike, but the 50-point increase wasn’t entirely unexpected.”

This is highly unlikely to be the last interest rate increase in the short term, either, he adds, with economists predicting several more hikes this year. Upper estimates have pegged the prime lending rate at 9.5% by December.

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Property market impact

While Clarke says there is always hope for a reversal of the upwards trend, the effect of the current increases on the property industry will be noticeable but not catastrophic.

“We do expect a slight drop in demand with a corresponding increase in stock levels. Buyers will be extremely demanding and cost-conscious and not afraid to push their luck during negotiations. Sellers will need to take this into account when positioning their properties, leaning on the skills of property professionals to compete effectively.”

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Clarke says that there could also be an increase in urgent and/or distressed property sales as people who previously bought at the limit of their affordability feel the pinch of higher interest rates. This, together with the general perception of a less favourable property finance landscape, could see some expansion of the rental market’s tenant pool.

Adrian Goslett, regional director and chief executive of RE/MAX of Southern Africa hopes that homeowners planned for these interest rate hikes and have already made room in their budgets to afford the slightly higher debt repayments.

The rising interest rates also pose challenges for real estate agents, as buyers are becoming more hesitant to purchase while interest rates are still climbing.

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“My advice to real estate practitioners at this time is to remind buyers that prime was at 10% pre-Covid, which means that interest rates are still at record lows despite these interest rate hikes.”

He adds: “I do expect that buyer activity will take a knock following this latest hike, but the demand for homes priced at fair market value should not be negatively affected following this latest announcement. This is where pricing a home correctly becomes so much more important. Sellers should lean on the advice of reliable real estate professionals to make sure they price the home correctly during this time.”

Bearing in mind that the desire among the country’s sizeable young generation of savvy, aspirational citizens is to own their own homes, and that activity in the marketplace is also fuelled by people relocating for a variety of lifestyle and other reasons, Andrew Golding, chief executive of the Pam Golding Property group, is optimistic that the residential property market will “continue to retain its resilience”.

“The impact on South Africa’s residential housing market is not expected to be significant, especially as this is still the lowest level of prime interest rate (now 8.25%, up from 7.75%) in more than two decades...”

Echoing this, Carl Coetzee, chief executive of BetterBond, says that while the 0.5% increase will have an impact on monthly bond repayments, and how much aspirant buyers will be able to afford, the prime lending rate is still considerably lower than it was two years ago before the pandemic.

The monthly repayment on a R2 million home at the start of 2020, when the prime lending rate was 10%, was R2 259 more than it will be at the current 8.25%, he says.

“Furthermore, there are ways to buffer the impact of rate changes. Working with a bond originator who will negotiate with the banks on a buyer’s behalf to secure a better rate will help soften the blow of this and subsequent rate increases.”

He adds that today’s rate increase serves as a reminder that affordability should always be a consideration when buying a home.

“Homeowners should factor future rate hikes into the calculations of what they can afford to pay on a bond each month.”

Rhys Dyer, chief executive of ooba Home Loans believes that today’s increase was expected and is still in-line with the company’s projections for 2022. And even though consumers are feeling the pinch all-round with rising costs of fuel, electricity and groceries, he believes that now is still a good time to purchase property for those who had planned to do so prior to the rate hike announcement.

“Residential property remains a good investment strategy and we are still seeing sustained activity – particularly around the R1.3 million mark. Most importantly, the banks are continuing to offer extremely competitive interest rates on home loans.”

Read our latest Home Improver digital magazine below

Echoing this, Samuel Seeff, chairman of the Seeff Property Group, says the residential market “continues to hold up well, with buyers showing strong confidence”.

“Although homeowners and property buyers need to adjust to higher home loan repayments, the reality is that the interest rate should remain below the pre-pandemic level.”

He adds that it is still “a great time” for buyers and sellers to take advantage of the current market conditions.

The increased competition from the banks, Dyer says, also means that the dream of homeownership more accessible for many, especially for first-time buyers and those who wish to benefit from the government-assisted FLISP subsidy. Furthermore, while the 0.5% hike may come as a shock to some, he predicts that a larger hike now will allow consumers to plan ahead as another rate hike in the next quarter is less likely.

Yael Geffen, chief executive of Lew Geffen Sotheby’s International Realty says the hike is “yet another blow for consumers already battling record-high fuel prices and food costs”.

“South Africans are being squeezed from all sides and there just isn’t that much give in the economy.”

However, she says the housing market is “still extremely buoyant”, but buyers need to budget carefully.

“There will be at least one more rate hike this year, so purchases must be made with that in mind.

“Property is unequivocally one of the best long-term investments right now in a very uncertain world, but buy wisely and buy what you can afford. That’s how to maximise your investment in the long run.”

Knowing that more interest rate hikes are forecasted for the year ahead, Goslett says the question of whether to fix the interest rate on a home loan has come up more frequently.

“The truth is that there are so many unknown variables around interest rate fluctuations that it is impossible to tell with absolute certainty whether fixing your interest rate now will be more beneficial for you in the long run.”

In calculations formulated by FNB property economist John Loos, this is how much more homeowners will pay on their home loans:

  • Repayments on a R1 million home loan will increase by R312
  • Repayments on a R2 million home loan will increase by R622
  • Repayments on a R3 million home loan will increase by R934
  • Repayments on a R4 million home loan will increase by R1 245
  • Repayments on a R5 million home loan will increase by R1 556

The table below shows approximate home loan increases based on your home’s value and future prime lending rate hikes.

For advice on how to hang on to your home, read this article.

Start your hunt for a property you can afford here.

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