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The Next Interest Rate Hike: What It Means for Your Home Loan Payments

As experienced bond originators in South Africa, we believe that we might see another interest rate hike in the near future. Although it may not be as significant as previous hikes, it is likely to be somewhere between 0.25% or 0.5%. The South African Reserve Bank (SARB) is likely to take this step to control the rising inflation in the country.

However, as a result of this hike, homeowners may start to experience affordability concerns. It becomes more difficult to service loans as interest rates increase, which is why we strongly advise homeowners to reduce their debt levels as much as possible to be able to accommodate such changes.

It's worth noting that rising interest rates tend to make buying or selling a home more challenging, while decreasing interest rates tend to make the process easier. The affordability of property decreases as interest rates increase.

home loan interest rates south africa

Rising Interest Rates in South Africa

Nonetheless, even as interest rates rise, the property value and housing prices might not be significantly affected if the economy grows fast enough. As a bond originator, we always advise my clients that there is always a light at the end of the tunnel in real estate, and it's just a matter of finding that opportunity in the current market. For instance, if economic uncertainty causes the housing market to cool, this could potentially open opportunities to purchase properties at reduced prices.

Buying a home as interest rates are rising shouldn't be something to fear. From a historical standpoint, the prime rate was as high as 25% at the start of 1994 but decreased to 7% at the end of 2020. Currently, the prime rate stands at 9.75%, which is still lower than historical comparisons. As a bond originator, I always advise clients to keep these historical trends in mind and not to panic in such situations.

Home Loan Repayment Calculator

For a bond amount of R750,000, the monthly bond payments at 9%, 9.75%, 9.8%, and 10% interest rates are R6,997, R7,114, R7,138, and R7,237, respectively.

For a bond amount of R1,500,000, the monthly bond payments at 9%, 9.75%, 9.8%, and 10% interest rates are R13,496, R14,228, R14,277, and R14,475, respectively.

For a bond amount of R2,000,000, the monthly bond payments at 9%, 9.75%, 9.8%, and 10% interest rates are R17,995, R18,970, R19,036, and R19,300, respectively.

For a bond amount of R2,500,000, the monthly bond payments at 9%, 9.75%, 9.8%, and 10% interest rates are R22,493, R23,713, R23,795, and R24,125, respectively.

In summary, the above shows that the monthly bond payments increase as the interest rate increases, and the higher the bond amount, the higher the monthly bond payment.

Your Questions Answered

A bigger concern arises when looking towards the next year and considering the predictions of many economists. In 2023, South Africa's GDP is expected to shrink, which will lead to an increase in unemployment rates and additional pressure on tax-paying citizens, in addition to the already rising interest rates. While the interest rates are still manageable at present, Goslett recommends that all homeowners position themselves to be able to afford higher repayments on their home loans and any other debts they may have.

This will ensure that they are in a good position should the economy experience leaner times in the coming year, as many economists predict. In relation to buying a new home or having a home loan, Nicky Weimar, the Chief Economist for Nedbank Group, addresses some common questions:

Is it a good time to buy when the interest rate is high?

Many individuals are motivated by the desire to own their property/house when investing in real estate. This investment converts a necessary monthly expense into an asset with intrinsic value, which can provide a future return when sold and collateral for future borrowing at more favourable terms. The cost of investing in property depends on various factors, such as the price of the property, the cost of financing, administrative costs, and long-term maintenance expenses.

Fluctuations in property value and interest rates can also affect prospective buyers. With the current increase in interest rates, the cost of financing rises, and demand for credit weakens over time, resulting in lower house prices. As house prices decline, it can be a good time to purchase property, provided you have enough financial leeway to withstand the risk of potential further interest rate hikes.

What are the advantages and disadvantages of purchasing a property when interest rates are high?

The benefits are associated with the possibility of obtaining a property (an asset) at a lower cost than during times of declining interest rates and increasing domestic demand.

The drawbacks are related to the risk that the property's financing cost may rise over the short to medium term as interest rates continue to increase.

Currently, the prime lending rate has increased by 2.75% (275 basis points) from 7% in November of last year to 9.75% in September. The Reserve Bank raised interest rates as inflation exceeded not only the central bank's 4.5% midpoint target but also the country's legislative target range's upper 6% limit.

Inflation is a hazardous economic phenomenon. If it is allowed to run unchecked, it becomes entrenched, feeds off itself, persists, erodes purchasing power, and ultimately harms economic growth and job creation. The initial inflation surge was fueled by rising global oil and food prices, which were exacerbated by Russia's war on Ukraine, causing global energy and food supplies to be disrupted and unsettled.

"While some of these price pressures are now receding, as evidenced by the recent series of petrol price cuts, it will take time to return inflation to the Reserve Bank's 4.5% target," says Weimar.

"Our headline inflation rate fell to 7.6% in August from a recent peak of 7.8%, still significantly above the target. As a result, we believe the Reserve Bank will increase interest rates further, possibly by another 1.25% to a peak of around 11%. Any prospective buyer must be able to handle the potential increase in their monthly bond repayment. While landlords may also increase rentals during times of increasing interest rates, it only affects rentals with a considerable lag, and landlords frequently cannot pass the full cost of the rate hike on to consumers."

However, house price growth is also beginning to slow. According to Lightstone's House Price Index, house price growth has declined from a recent high of 6% in June last year to a much more modest 3.2% in August of this year. Essentially, prospective buyers will need to balance these factors - rising financing costs versus lower house prices - against each other.

Anticipating the outlook of the real estate market is crucial for property investors in South Africa, as it affects not only their investment in a physical asset but also their prospects for economic growth. Since the Global Financial Crisis and the subsequent recession in 2009, the property prices in the country have been lackluster compared to other developed and developing nations. The sluggish economy due to political instability, policy uncertainty, state capture, rampant corruption, and structural issues, such as the persistent electricity shortage, has hindered the residential property market from recovering fully.

Despite some positive signals like the government's shift towards market-oriented policies, the majority of South Africans have yet to see any significant improvement in their living conditions. As a result, the country's growth prospects are limited, and there are still significant downside risks to consider. These factors will continue to have an impact on both the residential and commercial real estate sectors.

On a cyclical basis, the growth in property prices and sales is expected to slow down as interest rates rise. On the other hand, real estate in South Africa is relatively priced, and there is a stable demand for affordable housing and promising growth in the property market in coastal cities. However, it is essential for potential buyers to be prudent in their choices and consider the risks of buying a property in the current economic climate.

Phoenix Bonds – Bond Originators South Africa

If you're in the market for a home loan or are considering refinancing your current mortgage, consider using Phoenix Bonds. Our experienced bond originators can help guide you through the process, ensuring that you get the best possible deal and interest rate.

With our extensive network of lenders and our commitment to providing personalized service to each of our clients, you can trust that we'll work tirelessly to find the right home loan product for you.

Contact us today to learn more about how we can help you achieve your dream of owning a home in South Africa.

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