Prepare to pay more on your home loan as the interest rate soars

Prepare to pay more on your home loan as the interest rate soars

Any prospective homeowner may find it unsettling to purchase a property amidst a soaring interest rate hike. Along with rising fuel costs and higher-than-expected inflation figures, the idea of affording a new home would deter almost anybody from entering the buyer's market. Having said that, investors should act now to avoid further interest rate hikes.

Soaring interest and inflation rates

The South African Reserve Bank startled the financial markets by increasing its benchmark repo rate by 75 basis points to 5.5% at its July meeting, mirroring other central banks across the world. The repo rate was increased by the largest amount since September 2002 when a crisis in developing markets prompted a 100 basis points increase. This latest hike means that the prime lending rate of commercial banks has increased to 9%.

Rising above market expectations of 7.2%, consumer inflation reached 7.4%, the highest amount in 13 years, leading to this 75 basis points interest rate increase. The precautionary hiking cycle by the central bank began in November with an effort to reduce the gap between consumer inflation and the benchmark rate. 

This was the 5th consecutive hike, and experts predict that the benchmark interest rate will continue its climb in the months to come. SARB has increased its prediction for this year's headline inflation to 6.5%. Increased prices for food, fuel, and basic items are predicted to keep headline inflation high in 2023 at 5.7%. In 2024, headline inflation of 4.7% is anticipated, remaining constant from the May meeting.

Foreign investment

Local assets seem more enticing to foreign investors as a result of the high-interest rates they can receive in rands, but the rapid increases in US interest rates are taking their toll. In response, the rand has already begun to deteriorate and has crossed the R17/$ mark for the first time since 2020. Additionally, the Russian war in Ukraine is expected to continue into next year and might have substantial additional implications on world prices.

What does the new interest rate mean for homeowners?

Households who were already under strain due to the skyrocketing cost of petrol and food now have to cough up more for bond repayments, store credit and vehicle finance. To put matters into perspective, the most recent increase would result in an R950 monthly payment increase for prospective homeowners who take out a new home loan for R2 million at the prime rate. The monthly home loan repayment for this amount has increased by over R3 000 since November of last year.

With these increases and more to come, homeowners and potential buyers should move quickly to lock in the best-fixed interest rate on their home loans. The main benefit of a fixed-rate loan is that it guards you against unexpected and potentially large increases in monthly home loan repayments when interest rates climb. This rate, though, might be given to you higher than the current prime rate. On the other hand, variable-rate financing will cause your loan's interest rate to fluctuate based on the prime rate.

Making a sizable down payment when purchasing a home will help keep your monthly loan payments as low as feasible. Working with a reputable bond originator can also assist you in getting the most affordable interest rate.

If you plan on buying a home, the right time to do so is now. Get in touch with our real estate specialists at Tshenolo Properties. We will help you find the right home to suit your financial needs.