An unpopular yet unsurprising decision was made earlier today by the Monetary Policy Committee (MPC), as Reserve Bank Governor, Lesetja Kganyago, announced that the interest rates would increase by 25 basis points. This will bring the prime lending rate up to 10.25% and the repo rate to 6.75%.
While most financial analysts predicted that we would end the year at a repo rate of 6.75%, the timing of this hike is unfortunate. Just ahead of the Christmas season which sees an uptake in consumer spending, South Africans will now have to find room in their budget for higher instalments on their home loan and other debts.
“It is disappointing, but not unexpected that the MPC has chosen to increase rates at this meeting. The challenge now falls onto consumers who are already pinched by rising fuel costs, a weakening economy, and a month of increased expenses to keep up with the payments on their home loans and not fall behind on any other credit repayments,” says Regional Director and CEO of RE/MAX of Southern Africa, Adrian Goslett.
Believing that the inflation rate is still too close to the top end of the SARB’s 3.0%–6.0% target range for 2018, the MPC made the close call to raise interest rates at a time when a drop could have provided consumers with some much-needed relief and may have possibly stimulated the economy by allowing consumers some room in their budget to spend more on consumable goods and seasonal activities. The MPC was initially divided on this decision, with three members favouring a hike and three preferring to remain unchanged, but insists that after much careful discussion, decided that it would be better to raise rates now rather than later. However, homeowners must not use this as an excuse to fall behind on their debt repayments.
“As difficult as it may be, consumers will need to practice careful financial discipline to make sure they get through this Christmas season without leaving a dark mark on their credit record. Falling into arrears on your home loan is a dangerous slide towards financial ruin. If you are really struggling to keep up with your payments, perhaps consider renting out a room in your home if you have the extra space. Alternatively, you should consider downscaling, but this should be done before you reach a dire point in your finances which would lead you to accept low-ball offers out of desperation,” Goslett adds.
“For those who are delaying entering the market owing to the possibility of interest rate hikes, I would advise that they reconsider. Over the course of a twenty or thirty loan term, interest rate changes are inevitable and cannot be avoided. Much like annual rent increases, interest rate hikes are simply part of the risk of owning property. Waiting for ideal market conditions will delay your plans of entering the market, thereby delaying the time it will take for you to pay off your home loan and minimalizing the time you’ll have living in or renting out a property debt free and reaping the rewards of your investment,” Goslett concludes.