Rate hike a comma, not a full stop
However, says Shaun Rademeyer, CEO of BetterBond Home Loans, SA’s biggest mortgage originator, this is not expected to be severe, or lasting, unless more hikes follow in short succession.
“The current increase in the repo rate from 5% to 5,5% will only take the banks’ prime lending rate – and the mortgage rate – from 8,5% to 9%, which is exactly where we were before the last post-recession rate decrease, in July 2012. And there has been huge increase in the demand for property since then, even though consumers have had to contend with steep fuel and electricity price hikes and other significant cost-of-living increases.”
There are many reasons for this, he says, including a growing population, relatively low growth in low home prices and the banks’ increased appetite for long-term rather than unsecured lending. “But the major one is that many consumers have worked very hard since 2009 to clean up their credit records, reduce their debt loads, and not take on any new credit.
“This is clearly evident in the latest statistics, which show that the rate of new household credit creation has been dropping since November 2012, when it reached 10,4%, and was just 5,5% in December, compared to 5,9% a month before.”
“What is more, the rate of credit growth in the household sector is expected to remain below the rate of growth in disposable income, which is currently at 7%, for the foreseeable future. In short, consumers are in much better financial shape now, and actually much more able to deal with moderate rate increases, than they were at the start of the recession five years ago.”
Turning to specifics, Rademeyer says the rate increase means that a homeowner with an existing 20-year bond of R900 000 taken at 8,5%, for example, will see the minimum monthly repayment rise by almost R300, from R7 810 to R8 098.
“But it must also be said that a mortgage rate of 9% is still extremely low by SA standards – and that bonds granted at prime rate have in any case been a very rare occurrence for the past five years, with most being granted at one or two percentage points above prime. Our advice to those who have established a good payment record, and whose financial position has improved since their bond was granted would thus be to approach their lender now and see if they can negotiate a reduction in this differential.
“Alternatively, if they are worried about further rate increases, they may want to consider fixing their interest rate for the next few years. The banks usually charge a premium for this, but some consumers consider this a small price to pay for certainty when it comes to budgeting.”
Meanwhile, he says, first-time buyers should not be put off entering the market by the rates increase, but rather prompted to move quickly while it is still relatively easy to qualify for home loans – and before a steadily growing shortage of rental properties pushes rentals up even further.
“BetterBond statistics show that the average home loan currently required by first-time buyers is around R630 000, which at an interest rate of 8,5% meant a household income of around R18 000 a month was required to qualify. At an interest rate of 9%, that qualification level rises by just R1000 to R19 000 a month – while the monthly repayment rises from R5 467 to R5 668.
“However these figures are only indicative and prospective buyers should not delay getting into the market now, even if they have to buy a less expensive property to do so. A reputable mortgage originator will be able to advise them as to affordability and the best home loan options currently available to them.”