By Angelique Ruzicka, editor, Justmoney
Last week Gill Marcus governor of the South African Reserve Bank announced that the repo rate would increase by 25 basis points from 5.5% to 5.75%. This means that the prime lending rate will jump to 9.25%. But what does this mean for you?
Borrowers beware
The banks will be paying more money to borrow money from other banks thanks to the repo rate increase and unfortunately they are not kind enough to swallow up these costs so instead they will pass it on to you. If you have a personal loan, vehicle finance loan, mortgage, a credit card or any other type of loan you will be sure to see an interest hike shortly.
If you are a homeowner but still have a mortgage to pay then you will see an increase in your monthly instalments (see table below):
|
Loan value |
300k |
500k |
750k |
1,000k |
2,000k |
|
Instalment at 9.00% |
R2699 |
R4499 |
R6748 |
R8997 |
R17994 |
|
Instalment at 9.25% |
R2748 |
R4579 |
R6869 |
R9159 |
R18317 |
|
Change in instalment amount per month |
R49 |
R80 |
R121 |
R162 |
R323 |
Source: Standard Bank, correct as of 21 July 2014.
Banks are expected to get tougher when conducting affordability assessments so if you are thinking of moving home you should take into account that sales may fall through because borrowers, particularly first time buyers, may have their loan applications rejected by the bank.
There will be fewer people looking to buy too. Adrian Goslett, CEO of RE/MAX of Southern Africa says that future rate increases will delay many potential homebuyers from taking the leap. “Although homeownership is a goal for many South Africans, the increasing cost of obtaining finance will make it extremely hard for those who have not taken the provisions to prepare for purchasing a property. This doesn’t mean that consumers will let go of their homeownership dreams, it simply means that those wanting to buy a home will have to take the necessary steps now to ensure their goal can be reached in the future. Their focus will need to be decreasing debt levels and increasing savings.”
Renters
You will still be affected by the repo rate increase – particularly if your landlord is still paying the mortgage on the property you are living in. So expect to see an increase in your rent when it comes up for renewal.
Also, if you are sick of renting and looking to buy a new home know that it will be more difficult to get credit now. “If possible, those who can should try and reduce their debt levels as much as possible before the expected further rate increases kick in later this year. Especially consumers who are planning to purchase property and need to show the banks required levels of affordability,” advises Goslett.
Shoppers
The prices of goods and foods will go up because stores will be paying more on their loans. In fact, anything or anyone, corporate or consumer that is in the business of borrowing money will try and find a way to pass on the cost so expect to pay more in the stores.
Savers
The good news is that if you are a saver or a pensioner earning an income from savings then your money will enjoy a boost as the repo rate increase will mean a hike in most savings accounts’ interest rates. Your money, if invested wisely, will work for you then without you having to lift a finger.
Seven smart ways to deal with the increase in costs:
1. Pay more on your home loan to cut the loan term: A home loan is probably one of your biggest and longest commitments so see if you can pay more to shorten the loan repayments. It may be hard to see the benefits now but in the long term you will see the benefits when you retire (possibly even early) without the need to repay a mortgage.
2. Budget like you’ve never done before: Really try and verify where every Rand and cent goes, particularly if you are struggling to make ends meet. Check out how the One Rand Man evaluated his spending habits when taking up the challenges to live on R1 coins for the month of July.
3. Cut out the extra luxuries: Sugendhree Reddy, Standard Bank head of personal banking says: “Find ways to save. Think about those five cups of coffee that you buy at R20 from coffee shops and cut it back down to one. Also if you have a DStv contract but are struggling with debt then you don’t have your priorities right. Make lifestyle adjustments.”
4. Downgrade your lifestyle: If you are used to buying a premium brand try cut down to the no-name brand for a month. If you can’t taste the difference then stick to it and enjoy the savings that come with doing so.
5. Don’t splurge on birthdays: “If you are struggling financially don’t feel obligated to buy expensive birthday gifts,” says Reddy. Rather make arrangements with friends to cap birthday gifts at a certain amount and stick to the rules.
6. Consider getting another job: “In Australia and the United States it’s not uncommon for people to hold down two jobs to make ends meet. If you are good at a certain hobby like baking consider generating an income from it,” advises Reddy.
7. Fix your loan rates: Do you need certainty about what you’ll pay back on your loans? Then consider fixing them. “If you fix your rates you will be able to budget better. It depends but you could expect to pay around 0.5% more for fixed rates,” explains Reddy. It’s only possible to fix your home loan for two years but you can fix the entire term of your car loan.
“When it comes to interest rate hikes it’s not all doom and gloom,” says Reddy. “Rather see it as an opportunity to reflect and re-prioritise on your life. Start budgeting now and turn around your lifestyle.”