As if homeowners are not already buckling under financial pressure, the interest rate is expected to increase again next week.
Property experts predict a hike of either 0.25% or 0.5%, which will take the prime lending rate to 12% or 12.25% respectively.
“In my view this is extremely unfortunate,” says Richard Gray, chief executive of Harcourts South Africa.
“The consumer really can’t handle too many more economic shocks. They are already struggling with high electricity prices, high inflation, large municipal rates increases and already-high interest rates.”
If the rate is hiked again as expected, it will impact both homeowners and tenants negatively.
“Homeowners will struggle to make mortgage payments and we will see a higher number of defaults. Landlords will have to increase rental amounts to cover their additional financing costs, which will, in turn, place pressure on their tenants.”
He explains that the “higher-than-ideal” inflation rate is being caused by factors beyond the control of the consumer, such as the petrol price, electricity price, and the weak exchange rate.
“Increasing interest rates is simply going to hurt the consumer and the property market.”
Yael Geffen, chief executive of Lew Geffen Sotheby’s International Realty, says South Africa’s economic realities include a currency on a downward spiral, 14-year food inflation highs, abysmal unemployment numbers that amount to a national crisis, and declining household income.
“Since November 2021, homeowners with fairly modest R2 million bonds have been slammed with increases of more than R6,000 on top of the monthly mortgage repayments they were already making.
Should there be another repo rate increase – the eleventh consecutive hike in recent months, Carl Coetzee, chief executive of BetterBond says consumers and homeowners will be hit hard.
“On a R2 million home, as an example, an increase in the prime lending rate to 12% would mean an extra bond payment of R348 a month.”
Geffen says there is a limit to the amount of belt-tightening society can bear, and believes we’re close to reaching it.
“Poverty levels are rising and skilled individuals are leaving in droves. We simply can’t afford to lose any more.”
Citing a response to a parliamentary question tables in April, she says Finance Minister Enoch Godongwana reported that 32,831 individuals changed tax residence in the period between the 2017 and 2021 tax years – in other words, emigrated.
Of those individuals, he said 2,788 earned taxable income greater than R500 000 per year. A total of 1,125 earned more than R1 million per year.
“Godongwana was saying indirectly that South Africa is experiencing a massive economic exodus – an exodus of people who were heavily invested in the country’s property market...For those left behind, a higher repo rate means higher bond repayments and a crushing debt load on already overburdened South Africans. It’s a grim but realistic forecast of what’s ahead.”
For homeowners struggling to meet their bond repayments, Geffen says it is crucial that they proactively address financial difficulties and seek professional advice when needed.
“Open communication, diligent financial management, and exploring available resources can help homeowners navigate challenging times and avoid losing their homes.”
She also shares these tips:
Evaluate your budget
Take a close look at your monthly expenses and identify areas where you can make cuts or adjustments. Prioritise essential expenses and consider reducing discretionary spending to free up more funds for your mortgage payments.
Communicate with your lender
If you're struggling to meet your mortgage payments, communicate with your lender as soon as possible. They may offer options like loan modifications or new repayment plans to provide temporary relief and prevent foreclosure.
Consider refinancing your mortgage if it can help lower your interest rate or monthly payments. However, weigh the associated costs and potential long-term impact before making a decision.
Consider downsizing or renting
If the financial strain becomes overwhelming, explore the possibility of downsizing to a more affordable home or temporarily renting to alleviate the burden of homeownership costs.
Build an emergency fund
If you are still in a position to do so, establish an emergency fund to handle unforeseen expenses and provide a safety net during times of financial stress. Set aside a portion of your income regularly to gradually build this fund.
Coetzee says affordability is, as always, key, and urges homeowners to factor another interest rate increase in their budget.
“Even if the repo rate holds steady, homeowners could reduce unnecessary expenses to ensure that the bond is covered during this time. Also, those who have managed to pay their bonds at the current prime lending rate are urged to do so even if the repo rate drops next week. Any extra bond payment will help to shave months of the bond repayment period and save a considerable amount in interest as well.”
Homeowners should also bear in mind that interest rate increases and decreases are “par for the course” and the property market has proven to be a resilient asset class.
“All indications suggest that as inflation nears mid-point targets, the repo rate will hold steady and then start to drop. We are encouraged by the stance of the Bureau for Economic Research at Stellenbosch University that ‘moderating inflationary pressures supports (its view) that the South African Reserve Bank is close to ending the policy interest rate hiking cycle’. This may well be the last push before we start to see interest rates stabilise. A final few months of belt-tightening, although challenging, will be well worth it if it means that the prime lending rate will soon start to drop.”
Gray adds that, if you are in trouble with your home loan, all the banks have programs in place to help you. The best advice is to speak to your bank before it gets too bad.
For buyers, though, he says another hike should bring the country very close to the top of the interest rate cycle, and so, if you can afford a property at these interest rates, and secure finance when needed, then now is the time to buy.
“The market has become a buyers’ market and even at these higher rates there is good value to be found. Whilst it is very tough for homeowners right now, we hope that this is the end of rate hikes and that the pain will reduce when they start coming down at some stage.”