Nicolette Dirk, finance writer, Justmoney.co.za
The decision by the Reserve Bank, to raise the interest rate to 5, 5%, spells trouble for home loan providers.
This is according to Ian Wason, CEO of DebtBusters, who said the increase of just 0.5% will have a massive impact on consumers with home loans.
“Not only are these consumers already faced with price hikes in electricity, rates and petrol, but many of them are overloaded with unsecured debt as well. This may be the final straw for many of them, and I would expect to see a large spike in defaults on the banks home loan books in the month ahead,” he said.
Seeff chairman, Samuel Seeff was disappointed with the announcement of the 50-basis point increase to the repo rate.
“For the first time in five years, we have seen more balance in the housing market with buoyant demand and increased sales volumes in the major metropolitan areas. This hike is premature and is not related to the excessive demand in the market,” he said.
According to Seeff, the rate hike effectively reverses the 50-point reduction of July 2012 and takes bond repayments back to the pre-July 2012 levels.
“Based on a bond rate of 8, 5% and a 20-year repayment period, a home owner with a bond of about R800, 000 would see his/her repayment increase by R255 per month from around R6, 934 per month to R7, 189,” said Seeff.
What do the lenders say?
John Loos, household and property strategist for FNB home loans said a “massive spike” in home loan defaults seems hardly likely due to one single 50 basis point interest rate hike.
“My feeling is that banks, as a group, have been far more cautious in their lending in the past five to six years than was the case during the property boom years. The result should be far more robust home loans books,” said Loos.
Steven Barker, head of home loans at Standard Bank said he expected to see some increase in home loan arrears on the back of growing pressure on the consumer’s finance. This coming from the 50 bps rate increase in the lending rate and growing costs of transport and general living expenses.
Arrie Rautenbach, Absa’s head of retail banking believed that if rates are to be hiked further this year, the cumulative effect may certainly become more visible with regard to home defaults.
What are your options?
Rautenbach said a fixed interest rate is a more viable option for existing and prospective homeowners when interest rates are on a rising trend. But this decision is up to the consumer who will take his own financial position into account as well as the outlook for the interest rate cycle.
Loos said fixed rates are not there to “beat the market” but rather, a very useful instrument with which to fix a portion of your cash flows and thus reduce your risk.
“Unfortunately, the attractiveness of fixed rates has probably deteriorated due to the rate hike surprise, given that fixed rates are very much linked to market expectations of future interest rate moves,” said Loos.
Barker added that home owners need to be mindful that the fixed interest rate will often be slightly higher than the variable interest rate because it includes a premium for the certainty of not having their interest rate move during that period.
“Current fixed rate offers in the market could be in the region of 11.00% to 13% depending on the term of the fixed rate contract and rates will continue to change according to market conditions,” said Barker.
Loos said an alternative to fixing rates is to voluntarily set your monthly instalment at a level significantly higher than the required instalment value, so that the SARB would need to hike by a good few percentage points more before you are required to pay more.
“This forces you to adjust your lifestyle to the new financial limit and be better prepared for future interest rate hikes which may well happen,” said Loos.