Planning your purchase

There is little doubt that consumers can expect a further interest rate hike at this month’s Monetary Policy Committee meeting. According to Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa, this is not the first interest rate hike that consumers have had to face this year and it won’t be the last either. In fact, he says that financial institutions are expecting the prime lending rate to increase by a minimum of around 2% over the next two years.

“While we agree with financial institutions such as Standard Bank, 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 homeowners and potential buyers will need to make provision for this,” says Goslett. “Those who are looking to get into the market this year should factor the increase into their budget when assessing what they can afford.  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 homebuyers 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).”

Goslett notes that 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 2 years if this happens. 

This begs the question, is it an ideal time to fix your interest rate?  Goslett says that a fixed rate is definitely something to think about for homeowners that are risk averse or who want to have a fixed amount that they can add into their budget every month. If a homeowner 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 homeowners 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. Homeowners 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.

He notes that 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 emphasized. 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%,” says Goslett. “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.