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What the rates decision means for real estate

Despite a higher-than-expected rise in consumer price inflation at the end of August to 6,4% year-on-year, and the recent further decline in the rand exchange rate, Reserve Bank Governor Gill Marcus announced yesterday that the Monetary Policy Committee has decided to leave interest rates as they are, at least until November.
 
Citing concerns about economic growth, which only rose 0,6% in the second quarter of this year after declining by 0,6% in the first quarter, Marcus said it had been decided to keep the repo rate at 5,75% and prime (as well as the variable home loan interest rate) at 9,25%.
 
As a result, the repayment on a 20-year home loan of R757 125 – the current national average approved bond amount - will remain at R6934, according to SA’s leading mortgage origination group BetterBond Home Loans, while the repayment on the average home loan of R586 705 that is currently being approved for first-time buyers will stay at R5373.
 
“In addition,” notes BetterBond CEO Shaun Rademeyer, “there will be no increase for now in car instalments, credit card repayments or other debt commitments, and this will bring some relief to consumers who are battling to cope with considerably higher food, fuel and utility costs at this time.
 
“We do not, however, expect the stasis in interest rates to alter the slowdown in residential property market activity that has been taking place since the 25 percentage point interest rate increases that were announced in July. And the reason is the current shortage of residential stock for sale in popular areas and lack of new development to take up the slack, which has caused house prices to rise faster than expected.”
 
These price increases, he explains, make it more difficult for prospective buyers to qualify for home loans now, even if they are able to borrow at prime. “The average home price rose 8% in the 12 months to end-August, while the average salary or wage increase was only about 6%.
 
“At the same time, the higher cost of living as well as interest rate increases totalling 0,75 percentage points since the beginning of the year have eaten into the ‘free’ income available to cover a home loan repayment.”
 
Consequently, Rademeyer says, the best course for prospective homebuyers now is still to try to save up bigger deposits before entering the market, as this will not only make it easier for them to qualify for a loan, but lower their monthly home loan instalments.
 
“In addition, they really should obtain pre-qualification for a home loan before they start looking for a property, so that they know what they can realistically afford, and be sure to apply for their loan through a reputable mortgage originator as this will give them a much better chance of securing an approval. At BetterBond, for example, we obtained approved for more than 74% of all the loan applications we submitted in the 12 months to end-August.”


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