The interest rate hikes continue
Category Financial
The cycle of interest rate hikes continues following the latest announcement by the Monetary Policy Committee (MPC). The repo rate climbs by 50 basis points to 4.75%, leaving the prime lending rate at 8.25%.
Knowing that more interest rate hikes are forecasted for the year ahead, the question of whether to fix the interest rate on a home loan has come up more and 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.
'Benefits of owning a home remain constant amid rate fluctuations'
While the 50 basis point increase will have an impact on monthly bond repayments, and how much aspirant buyers will be able to afford, it is worth noting that 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%.
Furthermore, there are ways to buffer the impact of rate changes. Working with a bond originator who will negotiate with the banks on buyers' behalf to secure a better rate will help soften the blow of this and subsequent rate increases.
Using the same example of the R2 million bond, this means that a 0.61% concession on the current interest rate of 8.25% would reduce the monthly bond repayment by just over R750. And, if this revised monthly payment is compared with what a homeowner would have paid in 2020, the saving is a significant R3 016.
'Still a great time to buy a house despite the interest rate spike'
We are in a hiking cycle as SARB looks to normalise the rate and there is a further 100bps expected this year. Challenges for the economy include the CPI which, although unchanged, remains at the upper target range while the Rand has come under pressure.
The low GDP growth outlook could potentially be further impacted by the electricity crisis, fuel and food price hikes, supply constraints and fall-out from the Russia war in Ukraine,
Despite this, 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. Beyond the further 100bps, no further impact on the interest rate is predicted.
It is still a great time for buyers, but also sellers to take advantage of the conditions. The low interest rate is a strong support for the market combined with the positive bank lending which is at the best level since the introduction of the National Credit Act in 2007.
Deposit requirements are now as low as 6% to 7% with home loan finance more accessible as the banks continue competing strongly. Mortgage originator, ooba also reports that 60% of their approved mortgage bonds in the first quarter were above the R1.5 million price level.
There was a good case for hiking repo rate by only 25bps
Between the weaker rand, rising international interest rates and massive fuel price hikes on the horizon - which will likely push inflation over the SARB's 6% upper limit - there was little else the MPC could reasonably do..
This is highly unlikely to be the last interest rate increase in the short term, either. Economists are predicting several more hikes this year with upper estimates pegging prime at 9.5% by December.
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.
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.
While increases have been widely expected as part of the post-COVID interest rate normalisation trend, few expected the upswing to take such a sharp turn so early on.
Given the fragile state of the local economic recovery, with high unemployment, rising poverty levels and household finances under pressure from rising prices - including the prospect of another significant hike in the fuel price next month (June) as government's temporary R1.50 per litre general fuel levy subsidy ends, one could argue that any increase at all in the repo rate would over-burden consumers and further dampen the economy.
This is particularly so given the toll that persistent load shedding and the recent KwaZulu-Natal flooding are taking on the economy.
Current conditions could provide excellent opportunities for buyers with a long-term view of growth potential. It's definitely not the time to overextend, but to do a thorough budget analysis before any purchase. It would be wise for buyers to get prequalified. Getting pre-qualified is a very important step for a buyer when navigating the current market as it will help with figuring out your affordability.
That said, there are going to be some great bargains on offer, particularly for those able to mitigate the effects of more expensive lending through sizeable deposits or cash purchases, notes Clarke.
Goslett adds that 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.
Author: PROPERTY 24