After four, consecutive interest rate increases, there was scant hope that the MPC’s latest announcement would hold good news for homeowners. True to form, the 0.75% increase announced on 21 July will put pressure on households now facing prime of 9%.
“We’ve been expecting a slow and steady increase in interest rates for a while,” says Tony Clarke, MD of the Rawson Property Group. “Realistically, the lows that we had mid-pandemic were never going to be sustainable in the long term. Unfortunately, factors like international conflict, increasing global economic pressures and our own ongoing energy crisis have forced that slow and steady rise to take a steeper trajectory than we had hoped.”
Despite the sudden increase, Clarke points out that prime remains well below pre-pandemic levels.
“It’s very easy to get caught up in where interest rates are heading and forget to look at where they’ve come from,” he says. “In reality, we spent the full four years preceding the pandemic with prime hovering between 10% and 10.5%. Even if the SARB continues its current rate of hikes, we won’t hit those pre-pandemic levels for many months to come.”
In the meantime, Clarke recommends existing homeowners take a careful look at their budget to reduce the impact of rising interest rates.
“Now is definitely the time to start putting every spare cent into your bond if you have one,” he says. “Cut back on unnecessary expenses, avoid expensive short-term debt, and focus on chipping away at the capital amount of your home loan. The more you manage to do this, the less interest you’ll accrue on your loan over time. That can make a very real difference to the overall cost – and security – of your investment if interest rates continue to climb.”
For those already scraping the bottom of their financial barrel, however, Clarke says different strategies may be required.
“If you’re concerned about future affordability, the first thing you need to do is talk to your lender,” he says. “Most banks are very open to finding mutually beneficial solutions to assist bondholders over tough times – as long as they’re given fair warning. This is not one of those situations in which it’s better to ask forgiveness than permission. Options tend to shrink dramatically if you’ve already defaulted on your loan.”
Creative letting solutions like Airbnb or private lodgers can also be used to ease homeowners’ temporary cashflow issues. Existing rental investors who find themselves unable to cover rising costs, however, may need to consider liquidating underperforming units.
“Higher interest rates can actually boost rental markets, as fewer tenants become buyers,” says Clarke, “but rental income and property costs don’t always escalate at the same pace. Landlords struggling to make ends meet may want to refocus their property portfolios on units better able to produce sustainable income. Of course, this isn’t always an obvious or easy decision to make. Consulting with a professional rental agent can be extremely helpful.”
As for prospective buyers hoping to secure a new bond in the coming months, Clarke says there is no reason to put a pin in well-laid plans.
“Banks’ lending criteria will be getting stricter, but they’re also likely to have fewer applicants as affordability declines,” he says. “That means there could be a bit of a bunfight for really strong candidates armed with excellent credit records and reasonable deposits. This is definitely one of those times getting prequalified and having a bond originator negotiating for you can pay real dividends when offers hit the table.”
Qualified buyers will likely be spoiled for choice as tight finances drive more properties to sale. Clarke does not, however, expect to see any immediate negative impact on South African property price growth.
“We’re in a volatile period, for sure, but property is known for its ability to weather volatility,” he says. “The market has faced far worse than this and come up swinging on the other side. There’s no reason to believe this challenge will be any different.”