Why is the interest rate so important for the South African property market and homeowners?
Well, the fact is that there are only a handful of people in this country who can buy a home with cash. Most homeowners and potential buyers are loan-dependent and will require financial assistance from a lending institution to buy a home. As a result, the interest rate will affect most homeowners at some stage of their lives in some way.
Because the majority of the population is loan-dependant, fluctuations in the interest rates can have a substantial effect on potential buyers who are entering the property market and more particularly those who already own a home. To a large degree, homeowners who chose to fix their interest rate will be less affected by any changes; however, it is important to remember that they cannot fix the interest rate for the full term of the loan. It is inevitable that they will be impacted by interest rate increases at some stage. Homeowners who have kept their interest rate linked to the prime lending rate will have a reduced monthly repayment the lower the interest rate or an increased monthly repayment if it goes up.
An advantage of a low-interest rate is that it provides the opportunity to pay additional money into your bond account to reduce the term of the loan, without it having a severe impact on the monthly budget. The lower the rate, the easier it will be for homeowners to pay the required monthly repayment and add in a little bit extra.
Aside from the possible fluctuations on the monthly repayments for homeowners, the interest rate directly affects buyers wanting to purchase property and how much they can afford. Since the introduction of the National Credit Act (NCA), financial institutions have placed a great deal of emphasis on affordability levels, and a low-interest rate assists buyers to show higher affordability levels.
Lower rates mean that you will be able to afford a larger bond, provided that all other qualifying criteria are in place. It is important to consider whether you will still be able to afford the bond if the interest increases by between 1% and 2% just to play it safe.
Lower interest rates will also indirectly impact the amount of disposable income which is available within a household. Considering that disposable income weighs heavily in a consumer’s favour when applying for a home loan, as more buyers show affordability, demand in the property market increases. The increased demand pushes property prices up and will contribute to an increase in a home’s value over time.
Looking at it from an investment perspective, the increased demand for property as well as the reduced monthly repayments on home loans will result in investors gaining more from their property portfolios. For example, investors who have a rental portfolio will be able to charge the same rental for their units, while paying reduced bond repayments resulting in greater profit.
Homeowners and potential buyers who wish to reduce the impact of an interest rate hike should reduce their debt as much as possible and keep it to a minimum.