South Africans breathed a sigh of relief when the South African Reserve Bank kept the repo rate at 7% this month.
With the majority of current and prospective homeowners dependent on home loans to purchase property, any fluctuation in the interest rate has a major impact on the property market. “Stability in the interest rate will build consumer confidence and give them more time to sort out their financial situation and prepare for the year ahead,” says Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa.
The influence of the lending rate on a property
The prime lending rate has a substantial influence on the property market and potential homebuyers’ ability to get their foot on the property ladder. “An increase in the prime lending rate widens the gap for prospective homebuyers to meet the criteria set out by financial institutions to obtain a bond. A higher rate means higher bond repayments for home buyers or having to opt for a lower bond amount. In certain instances, this could potentially push lower-income earners out of the market completely,” says Goslett. “The interest rate directly affects the affordability levels of buyers wanting to purchase the property. In turn, affordability ratios will have an influence on the amount that the bank is willing to give the buyer, which could impact on the kind of property the buyer will be able to purchase.”
A bank’s decision when assessing a buyer’s affordability is driven largely by the prime lending rate. As interest rates increase, the buyer’s ability to reduce debt levels comes under pressure. According to Goslett, lower debt levels will increase an applicant’s chance of bond approval and will make affording a home much easier. It’s not just new entrants to the property market that are affected by rate fluctuations, current homeowners can be adversely affected by rising interest rates. This can be mitigated by choosing a fixed interest rate.
Homeowners with bond accounts linked to the interest rate will have to face either higher or lower bond repayments if the rate increases or decreases respectively. Where the rate remains stable and the homeowner’s income increases, it will give them the opportunity to pay additional funds into their bond account and reduce the term of their loan by several years.” Goslett says that an additional R1000 payment a month on a bond of R1 million at the current prime lending rate of 10.5% will reduce the term of the loan by almost five years. That is a 25% reduction in the term of the loan for a monthly repayment that is 10% higher. “By paying extra into the bond and reducing the term of the loan, homeowners will be able to decrease the overall interest amount that they pay on their bond. The money saved on interest can be put towards retirement or perhaps a child’s education,” he concludes
