19 September 2024

After a long period of relentlessly high interest rates, the South African Reserve Bank (SARB) has finally brought some relief to consumers. On 19 September 2024, SARB announced a 25-basis-point reduction in the prime lending rate, bringing it down from 11.75% to 11.50%. 

For South Africans battling high debt costs and those eyeing the property market, this move could be a step in the right direction. 

“While inflation and the economic challenges that contributed to the high interest rate are still a concern, the SARB’s decision marks a turning point for the economy,” says David Jacobs, Regional Sales Manager for the Rawson Property Group. “This cut is a sign that we are finally moving in the right direction. And the timing – right before the busy summer season– is perfect to stimulate renewed interest in the property market.”

A welcome respite for homeowners

The most immediate impact of the rates cut will be felt by existing homeowners, for whom the cost of servicing home loans will decline – albeit only slightly.

“Most home loans in South Africa are prime linked,” says Leonard Kondowe, National Manager for Rawson Finance. “That means the majority of bondholders will enjoy a 0.25% drop in their monthly repayments. That’s not a huge amount, but it will allow them to breathe a little easier after a prolonged period of financial strain.”

While it may be tempting to simply enjoy the extra cashflow, Kondowe advises homeowners to use this opportunity wisely. 

“I strongly recommend continuing to pay the higher amounts from previous months,” he says. “This will help reduce the overall interest paid on the bond and create a financial buffer that can be accessed in emergencies.”

A boost for first-time buyers

One of the most exciting outcomes of the interest rate cut is the positive impact it will have on first-time buyers. Lower interest rates make home loans more affordable, which could enable more people to qualify for financing and make the leap into homeownership. 

“Affordability has been a major barrier for buyers over the past few years, but this rate cut will help change that,” says Jacobs. “It’s likely to trigger increased activity, especially in the lower to middle price brackets, where demand has been strong but constrained by high borrowing costs. If rates continue to decline in future, which we expect they will, this trend will only gain momentum.”

Growth on the horizon

Experts agree that the property market, which has remained largely stable despite challenging economic conditions, is now primed for growth. With borrowing costs decreasing and consumer confidence starting to rebound, the property market is expected to see a resurgence in activity over the coming months.

“This rate cut couldn’t have come at a better time for the property industry,” says Jacobs. “Buyers and sellers have been cautious over the last year, but with rates heading downward, we’re likely to see a renewed sense of optimism. Pair that with the increase in buyer activity we traditionally see during the summer season and I think we’ll be having a bumper finish to the year.”

Jacobs expects market activity to increase across the board, but with a particular focus on more affordable properties. 

“The middle-income bracket always tends to be the most active,” he explains, “and with improved affordability, we should see strong demand for homes in the R1 million to R2.5 million range. These price points offer great value, especially for first-time buyers.”

A shift in the rental market?

The impact of the interest rate cut will extend beyond buyers and homeowners. The rental market, which has seen steady demand in recent years, may experience some shifts as well. 

“With homeownership becoming more affordable, some tenants may choose to move from renting to buying,” says Jacqui Savage, National Rentals Manager for the Rawson property Group. “This could result in a reshuffle in the rental market, with vacancies rising slightly as tenants transition into homeownership.”

While this may pose a challenge for some landlords, Savage believes there are still plenty of opportunities out there. 

“Landlords with well-priced, well-maintained properties should still see strong demand,” she says. “Tenants are looking for value-for-money and quality, and those who offer that combination will thrive, even as interest rates drop.”

Caution is still key

Despite the excitement surrounding the rate cut, Leonard Kondowe urges caution for both buyers and homeowners. 

“It’s still so important not to overextend yourself financially, even in this more favourable environment,” he says. “Look for properties within your budget and avoid taking on additional high-interest debt.”

He also encourages buyers to keep long-term affordability in mind. 

“It’s tempting to buy at the very top of your affordability range – particularly when future interest rate cuts are predicted – but it’s never smart to rely on assumptions. Rather leave a little wiggle room for unexpected expenses. You want to ensure you can comfortably manage your bond repayments even if your financial situation changes.”

For those with existing home loans, Kondowe suggests using the rate cut to accelerate bond repayment. “If you’re in a position to do so, keep up the higher bond payments from previous months. This will reduce your interest over time and give you a financial cushion should you need it.”