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South Africa’s property market is facing a new challenge in the form of increasing interest rates. The Reserve Bank has hiked interest rates several times in recent years, and experts predict that there may be more increases on the horizon. For prospective home buyers, this can mean higher mortgage payments and a more difficult path to homeownership. However, there are steps that can be taken to mitigate the impact of rising interest rates and ensure a successful property purchase.
The first step is to do your research. Understanding the current interest rate climate and how it may impact your mortgage payments is crucial. Take the time to speak with lenders, mortgage brokers, and financial advisors to gain a comprehensive understanding of the market and your options.
Another important step is to budget carefully. Review your income and expenses to determine how much you can afford to spend on a home purchase, taking into account potential changes to interest rates. Be realistic and conservative in your estimates, and factor in potential changes to your income or expenses in the future.
Consider different types of home loans as well. Fixed-rate mortgages offer a stable interest rate over the life of the loan, which can provide peace of mind in a fluctuating market. Alternatively, adjustable-rate mortgages may offer lower initial interest rates, but come with the risk of rising rates over time.
It’s also important to be patient and avoid rushing into a home purchase. Take the time to find a property that meets your needs and budget, and don’t be afraid to negotiate on the price or terms of the sale. Work with a reputable real estate agent who can guide you through the process and provide valuable insights into the market.
Understanding interest rates in South Africa
The South African Reserve Bank (SARB) plays a key role in setting interest rates in South Africa. The SARB’s benchmark interest rate, known as the repo rate, is the rate at which commercial banks borrow money from the central bank. This rate has a ripple effect on other interest rates in the economy, including the Prime Lending Rate that banks offer to consumers. To keep the economy stable, the SARB’s Monetary Policy Committee (MPC) convenes six times a year to assess the economic climate and make decisions about interest rates. The repo rate can be adjusted based on a range of factors, including inflation, economic growth or decline, and other factors that impact the country’s economic health.
What is the impact of interest rates on your home loan?
As a homeowner, changes in interest rates can have a direct impact on your monthly home loan repayments. When interest rates rise, your monthly instalments also increase. Conversely, if interest rates fall, you have the opportunity to pay off your home loan faster by continuing to pay the same instalment amount. For example, if you used to pay R500 per month before an interest rate cut, and your new instalment amount becomes R450 per month, you can continue to pay R500 and save money in the long run. BetterBond’s Additional Payment Calculator can help you determine how much you could save by paying extra towards your bond each month. For instance, on a R1,500,000 property at a 10.25% interest rate, you could end up paying over R3,500,000 over a 20-year period with a monthly payment of approximately R14,700. However, by making an extra payment of just R300 per month towards your bond, you could shorten the repayment period by over a year and save R130,000 in interest charges – enough to buy an entry-level car.
How to prepare for an interest rate hike
Understanding that changes to the repo rate can affect not only the interest rates on home loans but also other debts, it’s important to take proactive steps to prepare for potential interest rate hikes. By preparing for interest rate increases, you can minimize the impact on your home loan and overall financial wellbeing. Let’s explore some effective ways to prepare for possible interest rate hikes and protect your home loan.
1. Watch the SARB
The Monetary Policy Committee meets regularly six times a year and follows a predictable schedule. On the third Thursday of every second month, at around 3 pm, the Reserve Bank Governor makes the announcement whether the repo rate will change or remain the same. With ample information and predictions available about interest rate changes, it’s possible to prepare for potential interest rate hikes using some of the strategies we’ve outlined. By staying informed and proactive, you can minimize the impact of interest rate changes on your home loan and financial wellbeing.
2. Review your budget and your debt
To prepare for a possible interest rate hike, it is crucial to assess your budget. Evaluate your income and expenses to determine how much more you can allocate towards your home loan every month. Consider cutting down on non-essential expenses, such as eating out, to ease the burden of any potential additional charges. If the media is forecasting an interest rate hike, it’s advisable to avoid opening new accounts or acquiring new debt. If feasible, try to settle as many debts and accounts as possible since all debt repayments become more expensive when interest rates increase.
3. Reduce the time it takes to pay off your house
Paying extra towards your home loan during good times or when interest rates drop is a wise decision as it builds equity that can be accessed in the future if needed. Additionally, making payments above the minimum required amount will speed up the loan repayment process. The extra payments are applied towards the principal, reducing the overall debt on the property, rather than just towards the interest. As a result, the loan can be paid off faster, which ultimately reduces the total interest paid over the life of the loan.
4. Shop around to reduce monthly expenses
Shopping around to reduce monthly expenses is another way to prepare for an interest rate hike. Take some time to review your current expenses and see if you can find ways to save money. For example, you may be able to negotiate better rates on your insurance policies or switch to a different provider altogether. You could also look for ways to reduce your grocery bill by shopping for sales or switching to cheaper brands. Any money you save can be put towards paying down debt or building up savings to help you weather any potential interest rate hikes.
In Conclusion: Consider your options carefully before deciding to fix your home loan interest rate.
Opting for a fixed interest rate means locking in your interest rate for a certain period, usually ranging from one to five years. This implies that your home loan repayments will not change even if the interest rates increase during that time. However, the economy is prone to fluctuations and interest rates may fall again during this period, resulting in higher repayments when compared to the prevailing rates. Additionally, there may be extra expenses such as early termination fees associated with fixing your home loan interest rate. To make an informed decision, it is recommended to speak to your lender and understand the costs, benefits and potential drawbacks of this option before making a final decision.
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