How to prepare for interest rate hikes

At the end of March, the Governor of the South African Reserve Bank, Lesetja Kganyago, announced an interest rate hike above what was expected by many economists. While some predicted no hike at all, others believe this may be the last one for a while. But the question remains, how can households and consumers prepare for another interest rate hike?

The struggling economy and rising inflation has left many unable to pay-off their debt. Speaking after the release of Capitec’s latest financial results, Chief Executive Officer Gerrie Fourie had a message for consumers:

“We are seeing consumers taking pressure with expenses going up and incomes coming down. I think what I want to say is, don’t keep up with the Joneses, live within your means.”

The consensus is that increasing interest rates has the effect of bringing inflation down, but it also means the cost of paying back any debt you might have increases, which could leave many consumers in a situation where they are unable to fulfil their obligations. Fourie mentions debt review as a way for consumers to overcome the challenge.

“Debt review has been positioned in the market as a solution to financial problems, and there is a certain portion of clients who need it because they are in a bad financial space.”

He goes on to say that for some it’s better just to approach their bank to reschedule their debt.

A debt review is when a debt counsellor discusses payment arrangements with your creditors, to bring them down to something more manageable. While you will not be able to apply for credit when you’re under review, and will have to pay for the debt counsellor, the debt review process allows you to bring in a third-party with experience and knowledge on how to make the whole thing easier for you and your creditors.

Whether it’s your mortgage or credit card payments, rising interest rates also increase your payment obligations. Managing your debt, perhaps through a debt review process, is one of the things you can do to deal with rising interest rates. The second thing you can do is to get an understanding of what the interest rate hikes mean for you, particularly when it comes to savings and investments. If you’re already saving, interest rate hikes are good, if you’re borrowing, interest rates are bad.

You can also prepare for the next interest rate hike by refinancing your loans. This is when the terms of your loan agreement are renegotiated, whether that be the interest rate or payment schedule. By doing this before the rate increases, you can get ahead of the curve.

Coming back to savings, you can prepare for interest rate hikes by saving money for when you need it most, which could allow you to avoid taking out loans. Starting an emergency savings fund for you and your family could give you the opportunity to handle unexpected, or big expenses which you cannot plan for, or cannot afford under normal circumstances.

While economists don’t expect another hike soon, it’s better to be safe than sorry and plan ahead. You never know what’s coming next.