HOW TO PREPARE FOR INTEREST RATE HIKES: A GUIDE FOR SOUTH AFRICAN HOMEOWNERS

As a South African homeowner, you’re probably very well aware that changes to interest rates can have a significant impact on your home loan and, of course, your overall financial wellbeing. While a challenging economy and recent interest rate hikes may have you feeling a little worried, it’s important to know that there are measures you can take to reduce the impact of these increases on your wallet to give you some peace of mind. Let’s explore different ways that you can prepare your budget for the ever-changing interest rates.

Recent interest rates trends and the housing market in South Africa

Largely owing to record-low interest rates, the South African property market performed well in 2021, but the RE/MAX’s National Housing Report for the last quarter of 2022 showed that activity is starting to slow down. This, Regional Director and CEO of RE/MAX of Southern Africa, Adrian Goslett, said was a direct result of the year’s interest rate hikes. Constantly rising interest rates make it more difficult for potential homebuyers to successfully apply for, and afford a bond. Similarly, the prospect of rising interest rates can also lead to a drop in demand for properties.

Despite this, whether you’re looking to buy, sell, or invest in property, there are still opportunities in the South African market. By taking steps to prepare for interest rate hikes, you can position yourself to weather the market changes that often come with interest rate hikes.

What is an interest rate?

Before we look at preparing for an interest rate hike, let's understand what interest rates are and how they work.

Interest is the amount that lenders charge people who borrow money. This is at a set rate and is calculated as a percentage of the total loan amount.

When you take out a mortgage (home loan), you are borrowing money from a bank or other lender so that you can buy your home. The interest rate on your loan determines how much extra you will pay on top of the sum that you borrow (the principal loan amount). The total interest is worked out over the term of your loan - usually anything between 10 to 25 years.

Understanding interest rates in South Africa

In South Africa, the South African Reserve Bank (SARB) sets the baseline for interest rates. The repurchase rate refers to the rate at which the SARB charges commercial banks for lending money. Commonly known as the repo rate, it affects all other interest rates in the economy, most importantly the Prime Lending Rate which is the base rate that banks offer consumers. The SARB's Monetary Policy Committee (MPC) meets six times a year to review local and international economic conditions and set the repo rate. The repo rate can change in response to inflation, economic growth (or recession), and other factors that affect South Africa’s economic stability.

How many times can the repo rate change in a year?

As we have already said, the number of times the repo rate changes in a year depends on the economy. Stay on top of these changes and you'll be well-prepared for whatever the future holds. Usually, the interest rates tend to move only slightly (by roughly 25 or 50 basis points) a few times a year. It takes unusual events, such as the pandemic or the war in Ukraine, to cause bigger or more frequent changes to the interest rates. Interest rates reached a record low during the pandemic, but because of world and local economic trends in 2022, the SARB raised the repo rate - each time it met - six times last year. It also increased the repo rate, again, in January 2023. For an indication of how interest rates have moved over time,visit the SARB website.

What is the difference between the repo and prime interest rates?

The prime interest rate is not the same as the repo rate. While the repo rate refers to the rate at which the SARB charges commercial banks for lending money, the prime interest rate is the base interest rate at which the retail banks lend money to consumers (i.e. this is the amount that will affect everyday individuals). When you apply for a bond, the interest rate that the bank grants - above or below the prime rate - is directly related to your credit rating. Those with a good credit score have a better chance of being granted an interest rate below prime.

What is the impact of interest rates on your home loan?

When the interest rate goes up so does your home loan instalment (a.k.a. monthly repayment). On the other hand, when interest rates drop, as a home homeowner, you have the opportunity to pay off your home loan more quickly if you continue to pay the same instalment amount (e.g. You used to pay R500 p/m before the interest rate cut. After the interest rate cut, your new instalment amount becomes R450 p/m but you keep paying R500).

To calculate how much you stand to save by paying a little extra into your bond each month, you can use BetterBond’s Additional Payment Calculator which you will find on their website. As an example, a R1,500,000 property at a 10.25% interest rate will, in total, cost you more than R3,500,000 over a 20-year period of instalments at roughly R14,700 a month. By putting in just an extra R300 per month towards your bond, the repayment period would be reduced by over a year, saving you R130,000 in interest charges. That’s enough money to buy an entry-level car.

How to prepare for an interest rate hike

Now that we know that the repo rate impacts not only the interest rates on home loans but also all other debts, let's explore different ways you can prepare for an interest rate hike - to the benefit of your home loan.

1. Watch the SARB - forewarned is forearmed

We noted that the Monetary Policy Committee meets six times a year. They follow a recurring schedule and at 3 pm on roughly the third Thursday of every second month (i.e. January, March, May, July, September, November), the Reserve Bank Governor announces whether (or not) they’ve decided to change the repo rate. The press is full of information and predictions about interest rate changes. The experts are often right and this gives you time to prepare using some of the other strategies we outline.

2. Review your budget and your debt

Reviewing your budget is an essential step in preparing for an interest rate hike. Look at your income and expenses to determine how much more you can afford to pay towards your home loan each month. Knowing where you can cut out non-essential expenses (by, for example, eating in more), will help you cope with those extra charges if they do occur. If the news reports are warning about an interest rate hike, avoid taking on any new debts or opening any new accounts. If possible, pay off as many debts and accounts as possible: all debt repayments become more expensive when interest rates climb.

3. Reduce the time it takes to pay off your house: make extra payments

When times are good and/or the interest rate drops, keep on paying that extra amount into your home loan. This builds equity in your loan which you can access later should you need to, and paying more than the minimum amount on your home loan will also help you pay off your loan faster. When you make additional payments, that money goes towards the capital - the debt (amount you paid) on your property, itself, as opposed to the interest. If you settle that debt more quickly, you reduce the length of time it takes to pay your bond and, in turn, the total interest you will pay over the life of your loan will also be less.

If times are really tight and you have been diligently paying extra into your home loan every month, building up equity, you can approach your bank and ask that they refinance the home loan. They will do this based on the equity (or value) you have built up in the account - and on the property. Bear in mind that there are often additional charges that come with changing your bond agreement with a bondholder, so discuss this in detail with them before you make the final decision.

4. Shop around to reduce monthly expenses

For most of us, insurance is a grudge purchase and any bondholder is usually required to have both homeowners’ and life insurance. If you have a good track record, providers are often open to offering a better deal. This can apply to other insurance products so speak to your insurance broker about changing your cover to make premiums more affordable - without breaching your bond conditions. This applies to all other expenses. If you don’t have any inessential expenses to cut down on, shop around for better, more affordable deals on your other expenses.

Think very carefully before fixing your home loan interest rate

Fixing your interest rate locks in your interest rate for a set period, typically between one and five years. This means that even if interest rates rise, your home loan repayments will remain the same. However, a lot can happen in the economy in five years, including a reversal in the rising interest rate cycle, so that you end up paying a higher interest rate when the repo - and the bank lending rate - have dropped. Also, it's important to note that fixing your home loan interest rate can come with additional costs, such as early termination fees.

Always remember: before making a decision, speak to your lender so that you understand the costs, benefits and potential downfalls of fixing your interest rate and other changes to your bond agreement.

Need more guidance? Partner with RE/MAX

One way to stay informed about the property market and interest rate changes, is to partner with a reputable real estate agency like RE/MAX. We’ve been helping South African homeowners navigate the complexities of the property market since 1995, and our team of real estate professionals is here to guide you every step of the way. As a leading real estate brand in South Africa, RE/MAX has a team of experienced and knowledgeable real estate agents who can guide you through.

Have more unanswered questions? Here are some related topics that might help…

Do rising interest rates hurt home prices?

Yes, rising interest rates can hurt home prices, especially in the middle to lower segments of the property market. The higher cost of borrowing – your home loan – affects how much prospective buyers can afford to borrow. This means that buyers in a hurry to sell property may have to accept lower prices. This can have a ripple effect on the market, negatively affecting property prices.

Should I buy a house before interest rates rise?

The logical answer is probably yes, but actually, it’s a bit more complicated than that. A decision about buying a house is personal and interest rates may just be one factor influencing that decision. However, because it’s often hard to predict when interest rates will increase (or drop), it’s sensible to factor the possibility of an interest rate into your calculations.

Is it better to buy a house when interest rates are low or high?

The best time to buy a house depends on your personal circumstances and what you can afford. To help you budget more accurately, you will need to do your research to form a rough idea of what to expect. If interest rates are peaking, you could look forward to some relief when the rates drop.

For more in-depth answers to these questions, please reach out to your nearest RE/MAX Office for some free advice.