Get ready to tighten your belt a few notches

BY BONNY FOURIE bronwyn.fourie@inl.co.za

Pay off your debts with the highest interest charges, move to a smaller home and budget for ongoing bond repayment hikes, experts advise

HOMEOWNERS beware: your bond repayment is likely to increase again this month .

You will probably have to fork out more for your repayment as the prime lending rate is expected to increase again next week.

The current prime lending rate is 7.75%.

Next week, the Monetary Policy Committee (MPC) is expected to meet for the third time this year, and homeowners will find out whether their bond repayments are going to increase, decrease or stay the same.

However, John Loos, FNB property economist, says the prime lending rate will probably increase by 0.25%, taking it to 8%.

FNB predicts that the rate will increase by the same amount at each of the three meetings that will follow this month’s deliberations, ultimately making the prime lending rate 8.75% by the end of the year. Homeowners are therefore advised to evaluate their finances to make sure they can afford the potential increases, says Adrian Goslett, regional director and chief executive of Re/Max of Southern Africa. He adds that at the previous MPC meeting, two members preferred a 0.5% rise in the repo rate while three were in favour of the 0.25% increase.

To play it safe, he recommends that homeowners check what their monthly repayments would be if interest rates were to rise by 0.5% points at the next meeting.

“There are various online calculators that can help homeowners work out the possible repayments on a home loan.”

Equipped with this information, homeowners can examine their budgets to find the necessary funds to afford the higher repayment amounts if interest rates increase.

“Being well prepared can mean the difference between being financially secure and falling hopelessly behind on repayments,” Goslett says.

Knock-on effects Furthermore, he warns that, unless the accompanying interest rate charges on all other debts are fixed, these repayments will also increase should interest rates climb at the next MPC meeting.

“The disposable income for those who carry other forms of debt will shrink with every interest rate hike. My advice, especially for those who are paying off a home loan, is to funnel any extra cash towards those other debt repayments ahead of the coming announcement.”

He explains that, when deciding which debts to settle first, it is advisable to go for the debts with the highest accompanying interest rate charge.

“Things such as a car loan or personal loan will often carry far higher interest rate charges than a home loan, so it might make sense to try to pay off these debts as soon as possible.

“Moving to a smaller, more affordable, home might relieve the financial pressure and create a much less stressful home environment.”

Rising interest rates, lowered Covid restrictions and increasing expenses are a few of the factors influencing the property market, says Richard Gray, chief executive of Harcourts SA.

“Over the past two years of the pandemic, the real estate industry experienced interesting trends which, for the most part, had a positive impact on the market. Record interest rate lows, coupled with a major rise in demand by first-time buyers, translated into real estate companies reaching neverbefore-seen highs.”

But with normality settling in after changes to Covid the restrictions, the property market will see heightened activity in regions that have been greatly impacted by the pandemic.

“We will see a heightened interest to join the industry, developments will gain momentum, and interest in diversifying portfolios will come back to light.

However, there will also be some negative effects, Gray adds.

“The interest rate will rise back to its pre-Covid range in the next two years and ever-rising fuel costs, causing an increase in all household expenses, will play a major part with regard to affordability.

“It is hard to ignore that consumers are tightening their belts and many are in a price pinch, impacting consumer confidence,” he says.

Although buyers might be a little more cautious, he says this does not mean they are not going to buy property.

“What we need to understand is that in an emerging market like South Africa, with huge economic growth potential, real estate will always be a fantastic investment avenue,” Gray says.

But it is not just their bond repayments that homeowners need to consider, says Kondi Nkosi, country head for Schroders in South Africa.

This is because, like the rest of the world, South Africa is experiencing inflation with the prices of food, fuel, electricity and many other items going up fast.

Consumer price inflation in this country is currently 5.9% year-onyear (March 2022).

“It hasn’t been this high since 2017 and has been rising steadily since a low of 2% in early 2020.

“Elsewhere, American consumers are paying 8.5% more today for everyday goods than a year ago. That’s the highest rate of price increases in more than 40 years.

“In the UK, the year-on-year increase in prices is at 6.2% – again the highest rate in decades.”

But what is inflation? Nkosi explains that inflation describes a rise in prices.

Where official consumer inflation statistics are provided on a national basis, they are usually calculated by governments.

“They work out price changes by tracking a basket of commonlybought items. These will include food and drink; clothing and footwear; transport and energy costs, for example.”

He notes that there are other types of measures for inflation.

“Producer price inflation, for instance, tracks the prices manufacturers pay for the raw materials needed to make their goods. There are also measures for house price inflation and energy inflation.

“If the inflation rate is being reported as 5% year-on-year, it means that prices in general are 5% higher than they were this time last year.”

The most obvious danger of inflation, Nkosi says, is that if prices rise faster than incomes, people can afford to buy fewer goods and services. This can mean a fall in standards of living.

“In practice, inflation’s negative effects are more subtle, impacting different groups in different ways, and having a broader destabilising effect on societies.”

Recent research by Schroders looked back in history to see how stocks in certain sectors performed during periods of stagflation – which South Africa could face this year – when inflation is higher than average, but when economic growth is slowing. Nkosi says it concluded the best-performing stock market sectors during periods of stagflation were utilities, consumer staples and real estate.

THE PRIME lending rate is expected to increase next week, meaning homeowners will pay more on their bonds. PICTURE: RODNAE PRODUCTION