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With interest rates the lowest they’ve been in 50 years, there’s never been a better time to get onto the property ladder. In March, the South African Reserve Bank (SARB) kept the repo rate at a record low 3.5%. They are likely to maintain it at this rate for most of 2021, which means homeowners are unlikely to see any increases in their mortgage repayments this year.
But economists and property experts are predicting an end to this low interest rate ‘honeymoon’.
While rates are unlikely to be hiked dramatically to the highs of the 90s during which interest rates reached a height of 24%, even small hikes are set to have an impact on households and the credit markets.
Killer inflation?
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There are a number of reasons why interest rates could go up – it all depends on inflation, the central bank’s monetary policy, and the supply and demand of credit.
Frank Sibanda, financial planner at Fiscal Private Client Services, explains: ‘Interest rates are a function of the supply and demand of credit. An increase in the demand for money or credit will raise interest rates, while a decrease in the demand for credit will lower them. Conversely, an increase in the supply of credit will reduce interest rates while a decrease in the supply of credit will increase them.’
Sibanda says that inflation will be the driver of short-term interest rate increases. ‘The higher the inflation rate, the more interest rates are likely to rise. This occurs because lenders will demand higher interest rates as compensation for the decrease in purchasing power of the money they are paid in the future.’
Consumers of credit are also at the mercy of the SARB’s monetary policy decisions. ‘It is the role of the central bank to set up interest rates with reference to the level of expected economic activity and the expected rate of increase of prices, that is, inflation,’ he says.
Interest rate hikes
Data from Statistics South Africa (StatsSA) this month showed that the annual inflation rate increased to 3.2% in March from 2.9% in February. The SARB’s target is to keep the inflation between 3% and 6%.
This is one of the reasons that experts are divided on whether there will be a hike at the end of 2021. However, most agree that the SARB will push the repo rate up in 2022 instead of this year. Any increases are unlikely to be dramatic, though, which is good news for home owners.
‘They [SARB] have never done sharp increases, and next year we’re likely to see gradual increases. In the next three to five years the rates will still be below double digits, so we are in for a good time still,’ says Carl Coetzee, chief executive officer of BetterBond.
Home owner impact
The general consensus is that now is still a good time to buy a home, considering that interest rates are likely to remain low, albeit escalating gradually every year. But that doesn’t mean households can’t prepare for the inevitable increase in rates.
Coetzee advises house-hunters to not consider buying a home that comes close to the red line of their affordability. ‘If you buy now, you know the rates will go up next year. Look at the bond calculators such as ours at BetterBond and see how much an increase of a few basis points will cost you now, and budget for it. Don’t buy up to the max that you can afford right now.’
Property owners can be proactive too. Coetzee advises: ‘Look at all your debts, credit cards and store cards and try to pay those down as much as you can. If you are due for a bonus at the end of the year, use that to pay off the debt and get your disposable income up to as much as you can. If you are not going to gym at the moment and still have a contract, consider what you could do with that. Free yourself up as much as possible for when rates do go up.’
Megan Ladbrook, general manager of Frankie Bells Real Estate, adds: ‘Property owners looking to upgrade should do so cautiously and not extend themselves financially without making provision for an increased rate in the future.’
