Home Loan Rate Rise Will Boost Downsizing

As was widely anticipated, the Monetary Policy Committee of the Reserve Bank decided to raise the repo rate by 50 basis points to 6,75% - despite concerns that this would further dampen an already very sluggish economic growth.

The rate increase was announced today by Reserve Bank Governor Lesetja Kganyago, who said the decision had been influenced by the steep drop in the value of the rand as well as an unexpectedly large increase in consumer price inflation at the end of December to 5,2% (from 4,7% in November).

It was hoped, he said, that the interest rate increase would demonstrate the Bank’s commitment to consistency in trying to keep inflation under control, and help the rand to recover substantially over the next few months by attracting more investment to the country. This would benefit consumers in the long run.

Meanwhile, the increase will take the prime rate and variable home loan rate to 10,25% - and will immediately boost the monthly repayments due on all sorts of credit, from vehicle finance and credit card balances, to hire-purchase agreements and student loans.

“It will of course also increase the minimum monthly instalments on existing home loans by R33 per R100 000 borrowed,” says Shaun Rademeyer, CEO of BetterLife Home Loans, SA’s largest mortgage originator. “The homeowner with an R800 000 bond, for example, will now be paying an additional R264 a month. 

“And although this does not sound like a lot, when added to all the other increases that consumers are now facing, it is likely to hinder any upgrading plans – but on the positive side will give incentive to the trend among existing homeowners towards downsizing. 

“Consequently, we are not currently expecting a major decrease in repeat buying but we do expect that the average purchase value in this sector will decrease this year.” 

As for prospective homebuyers, he says, the message for them is simply to pay off as much debt as possible as fast as possible and then to “save, save and save some more” until they have a deposit of at least 10% to 15% to put down when they apply for a home loan.

“Although the banks are keen on new home loan business, they will undoubtedly become more cautious lenders in the face of this interest rate increase with more anticipated this year, and prospective borrowers who want to give themselves the best chance of being approved for a home loan will need to come prepared with a sizeable deposit as well as a clean credit record and a low debt to income ratio.” 

In addition, Rademeyer stresses the importance of getting a pre-qualification, now more than ever, to ensure that prospective homebuyers can house hunt with confidence and make a more informed decision based on affordability. 

Furthermore, it is vital to apply through a reputable mortgage originator such as BetterLife Home Loans - with access to multiple banking partners, a homebuyer’s chance of bond approval is greatly increased.