How interest rates influence home owners

While many might have seen or heard that interest rates are climbing, equally as many will fail to fully understand exactly how this affects them, which means that they are unlikely to know how to adequately prepare if interest rates continue to climb.

At the previous meeting in July, the Monetary Policy Committee (MPC) increased rates by 75 basis points. The next interest rate announcement, to be held on 22 September, is likely to result in yet another interest rate hike, so it will be beneficial to understand what this could mean for you.

To help you better understand how things work, Regional Director and CEO of RE/MAX of Southern Africa, Adrian Goslett explains that the MPC meets every second month to decide whether interest rates need to be adjusted to combat inflation and manage other risks to our economy. At this meeting, they will announce whether the repurchase rate, (most commonly referred to as the repo rate) will increase, decrease, or remain as is. This will directly affect the prime lending rate too.

While this distinction is unlikely to affect you directly, it is helpful to understand the difference if you want to grasp the broader concepts. The repo rate is the rate at which the South African Reserve Bank lends money to commercial banks. These banks then add their own mark-up on this rate which results in the prime lending rate: the rate at which banks lend money to consumers.

“To simplify, a hike in the repo rate will also raise the prime lending rate, which will mean that the interest you owe on any debt will automatically increase. It also means that any interest you earn on savings will increase. This is why it is so important for homeowners in particular to listen out for these announcements so that they can plan for the new instalment on their home loan should the prime lending rate change,” Goslett highlights.

In general, Goslett explains that the interest rates change incrementally which means that the knock-on effect on your monthly repayment is likely to be small. “However, homeowners should never underestimate the power of interest accumulating over the span of the loan term. To steal an example I used when interest rates were at 10.25%, a R1 million home loan would have ended up costing you R2,355,944 at the end of the 20 year loan period. At just a 25 basis point drop, the same home loan would end up costing you R2,315,664 at the end of a 20 year period, which is a saving of R40,280,” he explains.

To take advantage of this concept, Goslett encourages homeowners to pay a little extra towards their bond repayments each month when they can afford to do so. “That way, you won’t be badly affected if and when interest rates rise because you’re already used to paying extra on your repayments. Not only this, but by paying extra each month, you also cut down how much interest you will end up paying over the course of the loan term,” Goslett concludes.

For homeowners who would like to stay clued up on interest rates as and when they change, they can view the upcoming schedule of meetings on the MPC website. The announcements are always livestreamed at 3pm. The dates for the rest of the year are as follows:

• 22 September 2022
• 24 November 2022