The Reserve Bank’s Monetary Policy Committee (MPC) hiked the repo rate by another 50 basis points to 11,5% yesterday. As a result, commercial banks followed shortly afterwards with announcements that their lending rates to the public, i.e. prime and variable mortgage interest rates, are to increase by the same magnitude. Interest rates have been hiked by a total of 450 basis points since mid-2006.
The Managing Executive of Absa Home Loans, Gavin Opperman, says the latest hike in interest rates is set to further negatively influence the affordability of housing.
“Debt servicing costs will rise further, putting further pressure on the already stretched financial position of households as a result of additional factors such as higher fuel and food prices.
“The higher rates are set to further dampen activity in the housing market, which came under additional pressure with the implementation of the National Credit Act in June last year. While existing homeowners are faced with another rise in mortgage repayments, aspiring homeowners in especially the lower- and middle-income categories will find it increasingly difficult to afford a mortgage loan to buy their own home”, he said.
According to Opperman, the 450 basis point increase in interest rates since June last year have caused the average monthly repayment on a mortgage loan to rise by a total of 32%. He said that for example on a R500 000 mortgage loan over a 20-year period, the monthly repayment has increased from R4 992 in mid-2006 when the mortgage rate was 10,5%, to R6 584 at a mortgage rate of 15% - an increase of R1 592 per month. The latest 50 basis point hike in the mortgage rate added R184 to the monthly repayment.
“This illustrates the importance of factoring in an interest rate of a few percentage points above the prevailing rate at the time of applying for a mortgage loan, which will help an applicant to determine whether he or she will still be able to service the mortgage loan when interest rates are increased. However, interest rates have probably reached a peak now, with the economy showing definite signs of cooling off over a wide front and inflation expected to be lower in the second half of the year”, he said.
In view of consumers experiencing additional financial pressure as a result of the higher interest rates, Opperman again encourages existing and prospective homeowners to contact their bank to ascertain themselves of the various options available with regard to a mortgage loan.
These options include a fixed-rate mortgage contract for a certain period, which will give peace of mind in respect of future mortgage repayments during times when interest rates are rising; an extension of the term of an existing mortgage loan, taking into account certain conditions; the consolidation of other debt into a mortgage loan, provided that sufficient equity is available in the property; and depositing extra funds such as bonuses in the mortgage account, which will reduce the outstanding loan amount and thus interest payable.
Taking into account these developments, housing is, however, still expected to become more expensive this year, with price growth of around 7,5% projected compared with a growth rate of 14,5% recorded in 2007. “Rising house prices, albeit at a significantly slower pace than over the past few years, will contribute to affordability remaining one of the important factors influencing the market in future.
However, homeowners should not panic, as the market is expected to bottom towards the end of this year/early 2009, with price growth expected to pick up gradually to a level of about 12% by 2012. From the perspective of buying a property, late 2008/early 2009 will most probably the best time to buy, including for purposes of investment”, Opperman concludes.