What homeowners need to know about interest rate hikes

The South African Reserve Bank's Monetary Policy Committee raised the benchmark repo rate by 25 basis points to 4%. This means that the prime lending rate of commercial banks will increase to 7.50%. Even with the hike, the repo rate remains at the lowest levels in decades and will continue serving as an inducement to buyers. 

• How much more will you be paying?

For homeowners, the increase in interest rates influences how much more money you have to pay on your home loan premium each month. Assume your bond is worth R3 000 000 and your old premium was R23 711; with the interest rate increase, you will most likely pay an additional R452, making your new monthly premium R24 168.
Unfortunately, analysts believe that this is only the beginning of a series of increases. Given that rates seem to be headed higher, you may be tempted to fix your home loan rate.

• Should you fix your current home loan interest rate? 

If you decide to fix your home loan interest rate, keep in mind that you will most likely be granted a higher rate than you expected. You must first check with your bank as to what fixed rate it will provide you and for how long. Fixed rates issued by the bank fluctuate on a regular basis and are determined by a variety of factors, including the bank's forecast on the future movement of interest rates. This implies that you cannot pick the rate to set at, but you may get a quote on the rates available at the moment and choose whether or not to fix at the supplied rate.

If you choose the fixed rate offered by your bank, you will be unable to lock it for the remainder of your home loan term since banks will only fix a home loan rate for a maximum of five years. The longer you wait to set the rate, the higher the offer rate will be.

The disadvantage of this is that tying yourself into a fixed rate means you risk interest rates being low or falling even more during that time period, leaving you paying more than you would have.

• How does an interest rate increase affect first time home buyers?

Inflation has steadily increased and is currently close to 6% per year, owing primarily to rising fuel and electricity expenses. This means that most people have less disposable income, which is one of the most important variables that banks examine when reviewing a home loan application.

Because property prices, inflation, and interest rates are all rising, now is the best time for prospective home buyers to enter the market before growing expenses make it impossible. First-time buyers must act quickly and buy now, even if it means you purchasing a smaller and less expensive property than you intended. This will give you some financial wiggle room to deal with the consequences of rising interest rates over the following 12 to 18 months.

• Future predictions

Absa economists predict another 50 basis point tightening this year, and 75 basis points in 2023. These normalisation climbs will be placed at intervals, with the next one scheduled for May. 

They also feel that the risks are skewed toward front-loading these rises, depending on how the data comes in and how the rand trades in the next months. The market reaction to the 2022 Budget, which is due on February 23rd, might potentially be significant.

Along with analyst predictions, the Reserve Bank's quarterly prediction model states that this will happen until 2024.

If you want to take advantage of current low interest rates, contact Knight Frank now. Our property practitioners will help you find the perfect property.