How to deal with increasing interest rates

How to deal with increasing interest rates

Are you feeling the squeeze of rising interest rates? The recent hike in the repo rate has further limited the spending power of many homeowners and buyers. Navigating the recent hike in interest rates and securing a desirable financial future is possible by taking a proactive approach.

The South African Reserve Bank (SARB) raised the repo rate by 25 basis points on January 26, 2023, bringing the interest rate to 7.25% and the prime lending rate to 10.75%, the highest in five years. The hike has exacerbated a challenging financial situation for many who already have substantial mortgage and loan obligations.

What does an interest rate rise mean?

An increase in interest rates can affect the real estate market by making loans less competitive for financing property purchases. Moreover, rising interest rates might dampen the real estate market by dampening demand. Bonds and other fixed-interest investments might lose value if long-term interest rates rise.

Implications for interest rates hike on homeowners and buyers

Homeowners and buyers in South Africa can suffer severe consequences from increased interest rates, especially if they have variable-rate mortgages. In addition, those planning to buy a house may also be affected by the rise in interest rates because borrowing money may cost more. For example: If you are paying a home loan value of R1 million, your current payment before the hike was R9 984, and after the prime lending rate increase of 25pt, which is 10,75%, you'll be now paying R10 152 (an increase of about R168).

When interest rates are increased, it can have significant implications for homeowners who have a mortgage or any other type of debt. When rates rise, people have to pay back more of their loans, which can burden their budgets. Many options are available for homeowners and buyers to lessen the blow.

Here are some suggestions that you should consider:

• Build up your credit score

Working to raise your credit score is a great place to start if you want better terms when remortgaging or negotiating a new mortgage. With a higher credit score, you have greater leverage in loan negotiations, access to better interest rates, and more. Even if you aren't planning any immediate changes, it can help you save money and receive a better mortgage offer.

• Review your budget

To keep your finances under control in the face of rising interest rates, you must first take ownership of your current financial situation. Make a list of all monthly expenses, including rent/mortgage, groceries, fuel, and entertainment. Then, eliminate any unnecessary costs to manage your finances better. Spending less will mean having more cash available for paying off debt. 

• Consolidating your debt

Debt consolidation is combining multiple debts into a single, more considerable debt. The idea is to take out a loan with a lower interest rate to pay off your debts. If you consolidate your debts into one monthly payment, you'll have one amount to track and make to your creditors. 
 
For example, if you had five loans that you were paying to separate lenders, a consolidation loan would consolidate them all so that you just had to pay one bank lender.

• Evaluate fixed vs variable interest rate loans

An interest rate on a fixed-rate loan does not change with the market or the economy during the loan period. Variable-rate loans, on the other hand, have interest rates that alter with market or economic conditions. If you have a variable-rate loan, consider refinancing into a fixed-rate loan to lock in a lower interest rate before it rises. 

For instance, a person borrows R500,000 at a fixed interest rate of 10.75% for ten years. The borrower's regular monthly payments will stay the same for this loan's duration. However, a variable interest rate loan will fluctuate as the rate changes.

Whether you are looking to buy or sell a home, Tshenolo Properties can assist you in finding your dream home. Get in touch with our real estate agents at Tshenolo Properties today.