“While we agree with financial institutions that we will not see the same financial conditions we experienced in 2008, the fact remains that the interest rate will be going up and home owners and potential buyers will need to make provision for this. Those who are looking to get into the market this year should factor the increase into their budget when assessing what they can afford," says Adrian Goslett, regional director and CEO of RE/MAX of Southern Africa.
"It is important to note that the 2% prediction is on the lower end of the scale and it could be more if the country is downgraded to junk status. We recommend home buyers factor in this 2% rise in rates when calculating their mortgage repayments. It is further recommended to put down a larger deposit where possible, which will give the buyer more leverage when negotiating with the banks on price (lending rate).”
In the instance where the downgrade occurs, it will place further pressure on the Reserve Bank to again increase the interest rate. Although not likely, it is not completely out of the realm of possibility that we could see the rate increase by as much as 5% over the next two years if this happens.
This begs the question whether it is an ideal time to fix your interest rate. Goslett says that a fixed rate is definitely something to think about for home owners that are risk averse or who want to have a fixed amount that they can add into their budget every month. If a home owner is stretched to the limit they may want to fix their rate to ensure that there are no additional or unexpected expenses that they will have to deal with over the next two years. However, there are a few aspects that home owners should consider before deciding to fix their rate.
“Generally speaking a fixed rate is normally between 1.5% and 2% above the current prime rate, depending on the agreed terms of the contract. This means that a fixed rate will only be a worthwhile option if the rate does indeed creep above the predicted 2% marker. The length of the fixed rate period is also a critical factor. Home owners should check all the options available to them and confirm whether an administration fee will be charged to a fixed rate contract before signing,” advises Goslett.
Due to the fact that so many consumers have interest-bearing debt, the cumulative effect of both the short and long-term debt could be financially devastating with the expected rate hikes. “The importance of reducing short-term debt cannot be over emphasised. Reducing debt levels will mitigate the compound effect of the interest rate hikes to some degree. However, even so consumers will still need tighten their belts and cut back on unnecessary spending,” adds Goslett.
Despite the expected rate hikes, property continues to be a solid asset class in which to invest, Goslett assures. “Property prices continue to see growth, particularly in the Western Cape. Growth in this region is around 11.2% per annum compared with the rest of the country that is experiencing a growth rate of approximately 6%.”
“Those who are able to meet affordability criteria and have access to finance will find opportunities in the market; however, they will need to have a plan of action to weather the interest rate storm ahead,” he concludes.
