So we have dodged a bullet with regard to the anticipated interest
rate hikes on 22 May 2014. If you have bond, vehicle or any other large
debt, this would certainly have affected you. The question is whether
you would have had the additional
funds to pay for this, usually, unbudgeted expense. South African
consumers have been fortunate to have enjoyed fairly low interest rates
over the last few years and this has led to many taking out bonds or
buying vehicles in this period. This
has been in contradiction of economists and financial experts appealing
to consumers to pay off as much debt as possible.
The reality is that the majority of us will take on debt when it is
“cheaper” to do so. That dream home is so much more affordable when the
repo rate (rate at which banks borrow money from the Reserve Bank) is
around 5%. That would mean we would get
a bond at around 9% on the interest rate (if our affordability and
credit status was good).
A problem would arise if we would go with our maximum affordability and
not take cognizance of interest rate hikes. Let’s have a look at how a
100 basis point (1%) interest rate hike would affect your repayments on a
R700 000 and R1 000 000 home
loan.
| Bond Amount |
Repayment on 9% |
Repayment on 10% |
Increase in Repayment |
Bond repayments with 1% increase
| R700 000 |
R6 298 |
R6 755 |
R457 |
| R1 000 000 |
R8 997 |
R9 650 |
R653 |
How about an increase of 200 basis points (2%)?
| Bond Amount |
Repayment on 9% |
Repayment on 11% |
Increase in Repayment |
Bond repayments with 2% increase
| R700 000 |
R6 298 |
R7 225 |
R927 |
| R1 000 000 |
R8 997 |
R10 322 |
R1 325 |
As you can see, the reality of an interest rate increase is a rather
large blow to your disposable income and your budget as a whole. So if
you are in the process of buying a home, remember that you need to take
potential interest rate hikes into
account. This would also ring true for fixed interest rate deals as
banks will not give you a fixed interest rate for the entire term of the
bond.
What are the chances of interest rates going up soon? No one would be
able to give you a definitive answer as it is based on a number of
factors such as the rate of growth in our economy, inflation, strike
activity and a final decision by the
Monetary Policy Committee.
If we look at the history of interest rates in South Africa since 1998,
the low interest rate trend after 2010 is very apparent. According to
Gill Marcus (Governor of the Reserve Bank), the MPC holds the view that
South Africa is on a rising
interest rate cycle.
What are your solutions to a rising interest rate over the next few months?
If you have been paying more than your required installment on your
bond, you are already ahead of the pack and the impact will not be that
bad for you. If you are not paying more than the required installment,
now would be a good time to start!
If your bond is more than a year old, approach your bank for a rate
review. Even a .25% decrease in your rate will make a difference. Just
remember to continue paying your original installment and not the
decreased amount when the decrease takes
effect.
If the increase in interest rates is really affecting your finances and
ability to pay, you can increase the term of your bond from 20 to 30
years depending on your age and risk factors. This is a last resort and
should be rectified when your
finances have recovered by you paying more into your bond.
We hope that this this newsletter has provided you with the reality of
interest rate hikes and its impact on your personal finances. Remember
that even if you don’t have a home, interest rate hikes will affect you
indirectly with increases in
transport, consumer goods and rent. Make sure you are on top of your
finances and ensure your credit status is in good standing. That is your
first step to ensuring you always get the best interest rates. Visit
www.credithealth.co.za for more
information.
