Interest rate hikes……Yikes- Credit Health Cronicles

Clearing muddy waters of credit amnesty
May 23, 2014
Credit Amnesty
May 30, 2014

 

So we have dodged a bullet with regard to the anticipated interest rate hikes on 22 May 2014. If you have bond, vehicle or any other large debt, this would certainly have affected you. The question is whether you would have had the additional funds to pay for this, usually, unbudgeted expense. South African consumers have been fortunate to have enjoyed fairly low interest rates over the last few years and this has led to many taking out bonds or buying vehicles in this period.  This has been in contradiction of economists and financial experts appealing to consumers to pay off as much debt as possible. The reality is that the majority of us will take on debt when it is “cheaper” to do so. That dream home is so much more affordable when the repo rate (rate at which banks borrow money from the Reserve Bank) is around 5%. That would mean we would get a bond at around 9% on the interest rate (if our affordability and credit status was good). A problem would arise if we would go with our maximum affordability and not take cognizance of interest rate hikes. Let’s have a look at how a 100 basis point (1%) interest rate hike would affect your repayments on a R700 000 and R1 000 000 home loan.

Bond repayments with 1% increase

Bond Amount

Repayment on 9%

Repayment on 10%

Increase in Repayment

R700 000

R6 298

R6 755

R457

R1 000 000

R8 997

R9 650

R653

How about an increase of 200 basis points (2%)?

Bond repayments with 2% increase

Bond Amount

Repayment on 9%

Repayment on 11%

Increase in Repayment

R700 000

R6 298

R7 225

R927

R1 000 000

R8 997

R10 322

R1 325

As you can see, the reality of an interest rate increase is a rather large blow to your disposable income and your budget as a whole. So if you are in the process of buying a home, remember that you need to take potential interest rate hikes into account. This would also ring true for fixed interest rate deals as banks will not give you a fixed interest rate for the entire term of the bond. What are the chances of interest rates going up soon? No one would be able to give you a definitive answer as it is based on a number of factors such as the rate of growth in our economy, inflation, strike activity and a final decision by the Monetary Policy Committee. If we look at the history of interest rates in South Africa since 1998, the low interest rate trend after 2010 is very apparent. According to Gill Marcus (Governor of the Reserve Bank), the MPC holds the view that South Africa is on a rising interest rate cycle. What are your solutions to a rising interest rate over the next few months? If you have been paying more than your required installment on your bond, you are already ahead of the pack and the impact will not be that bad for you. If you are not paying more than the required installment, now would be a good time to start! If your bond is more than a year old, approach your bank for a rate review. Even a .25% decrease in your rate will make a difference. Just remember to continue paying your original installment and not the decreased amount when the decrease takes effect. If the increase in interest rates is really affecting your finances and ability to pay, you can increase the term of your bond from 20 to 30 years depending on your age and risk factors. This is a last resort and should be rectified when your finances have recovered by you paying more into your bond. We hope that this this newsletter has provided you with the reality of interest rate hikes and its impact on your personal finances. Remember that even if you don’t have a home, interest rate hikes will affect you indirectly with increases in transport, consumer goods and rent. Make sure you are on top of your finances and ensure your credit status is in good standing. That is your first step to ensuring you always get the best interest rates. Visit www.credithealth.co.za for more information

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