South African homeowners are probably very well aware that changes to interest rates can have a significant impact on a home loan and, of course, one’s overall financial wellbeing. While a challenging economy and recent interest rate hikes may have some homeowners feeling a little worried, there are measures that can be taken to reduce the impact of these increases on your wallet.
“Whether you’re looking to buy, sell, or invest in property, there are plenty of opportunities in the South African property market. By taking steps to prepare for interest rate hikes, you can position yourself to weather the market changes that often come with an interest rate hike,” says Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa.
Before we look at preparing for an interest rate hike, it is important to understand how interest rates work. In South Africa, the South African Reserve Bank (SARB) sets the interest rates. The repurchase rate refers to the rate at which the SARB charges commercial banks for lending money. Commonly known as the repo rate, it affects all other interest rates in the economy, most importantly the Prime Lending Rate which is the base rate that banks offer consumers. The SARB's Monetary Policy Committee (MPC) meets six times a year to review local and international economic conditions and set the repo rate. The repo rate can change in response to inflation and other factors that affect South Africa’s economic stability.
Usually, the interest rates tend to move only slightly (by roughly 25 or 50 basis points) a few times a year. It takes unusual events, such as the pandemic, to cause bigger or more frequent changes to the interest rates. Following the record low it hit during the pandemic, the SARB has since had to raise the repo rate six times in 2022 - each time it met - and raised it again in January 2023. For an indication of how interest rates have moved over time, visit the SARB website.
Because the repo rate impacts not only the interest rates on home loans but also all other debts, there are various ways one can prepare for an interest rate hike.
1. Watch the SARB - forewarned is forearmed
The Monetary Policy Committee follows a recurring schedule and always make their announcement at 3pm on roughly the third Thursday of every second month (i.e. January, March, May, July, September, November). “Leading up to an announcement, keep an eye on the local news. The press is full of information and predictions about interest rate changes. The experts are often right (or close enough to right) and this can give you time to prepare ahead of an announcement,” Goslett recommends.
2. Review your budget and your debt
According to Goslett, reviewing your budget is an essential step in preparing for an interest rate hike. “Look at your income and expenses to determine how much more you can afford to pay towards your home loan each month. Knowing where you can cut back on non-essential expenses will help you cope with those extra charges if they do occur. If the news reports are warning about an interest rate hike, avoid taking on any new debts or opening any new accounts. If possible, pay off as many bad debts as possible, as all debt repayments will become more expensive if interest rates climb,” he notes.
3. Make extra payments whenever you can
When times are good, Goslett strongly advises homeowners to keep paying extra into their home loans. “Not only will this build up equity in your loan which you can access later should you need to, but paying more than the minimum amount on your home loan will also help you pay off your loan faster and cut down on interest charges. If times do get tight and you have been diligently paying extra into your home loan every month, you could potentially approach your bank and ask to refinance the home loan based on the equity you have built-up within the account.”
For those who are on the fence about buying while interest rates are climbing, Goslett notes that the decision about buying a house is personal and interest rates may just be one factor influencing that decision. “Because it’s hard to predict when interest rates will increase (or drop), it’s sensible to factor the possibility of an interest rate into your calculations whenever you choose to buy. Owning a home is a long term financial commitment which means that at some stage during the loan term, a homeowner will eventually have to deal with interest rates changing. As long as a buyer has factored this into their calculations, then the sooner they can enter the property market, the better,” Goslett concludes.