The latest interest rate increase brings to an end a remarkable run of six consecutive reductions since November 2019, when it dropped from 10% to 9.75%. The prime lending rate, being at a historical low, saw all borrowers benefiting by reducing the cost of servicing the interest charge linked to their loans.
In recent years, the South African economy has been through a lot; from credit rating agency downgrades, the global recession and the unprecedented impact of a global pandemic. These are some of the factors that contributed to the reasons why the South African Reserve Bank chose to reduce rates over a prolonged period. However, the pressure of consumer price inflation and the need for government to borrow more to fund its expenditure, has meant that increasing the interest rate is key to curbing runaway inflation and to attract outside investment capital.
What this means for the average consumer, is that government is beginning to place more weight on the long-term consequences of managing the economy, as opposed to the necessary short-term stimulus of rate-cutting during the height of the lock down.
As we move towards a post-Covid-19 era, it is important for consumers who have borrowed loans, especially long-term loans such as home loans, to understand the effect of this interest rate increase on their loan repayments.
The first thing to note is that the effect of all interest rate increases is effective immediately and your next repayment instalment will reflect this increase.
The next factor to consider is the size of the increase, at 0.25% this should not materially impact your repayment or cause you any alarm. However, it is important you start realising that you should only take out more debt if necessary and preferably good debt, such as debt to purchase an asset like property. The impact of 25-basis points on its own might not be costly but cumulatively it will start to be significant, especially when multiple loans are taken.
One common reaction from borrowers could be to investigate the option of fixing their rate for fear of multiple interest rate hikes in the coming months into 2022. The goal is still to ensure they can continue to enjoy the benefits of a low interest environment, even with the 25-basis point increase.
Fixing your interest rate as a reaction to this rate hike is not recommended and it will wipe out the gains afforded by a low interest rate faster than the rate hikes could possibly do.
To put the latest rate hike into perspective, the repayment amount on a R1m bond will increase your monthly instalment by R150 per month (from R7,750 up to R7,900).
According to the latest MortgageMarket.co.za home loan application data, the average price of a home in South Africa is around R1.25m, which means that most homeowners will only have to budget for an increase of about R220 on their monthly home loan instalment.
Below is a table that outlines the 0.25% increase in the rate on the home loan repayment
As we approach 2022, it would be prudent to start to put aside 5% of your monthly repayment to manage potential future hikes of another 25-basis points. Having said that, the interest rate in general will remain relatively low in the short-term, given the slow economic growth, stable inflation and a lack of job creation.
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