Experts agree that South Africans will be facing higher interest rates soon. In order to keep or purchase a home, we will all have to reassess our spending habits.
No one actually knows what's going to happen as far as interest rates go in the short term. The general consensus is that the rate will increase, but by how much and how frequently is anyone's guess at this point. What has become apparent is that the junk status label is not something we can wish away and, even if government adopts a more proactive stance on the issue and appoints new ministers, it's going to take years for South Africa to get out of the credit rating hole.
This leaves homeowners in a very precarious position, but it needs to be remembered that although interest rates have skyrocketed in the past, many thousands of homeowners have managed to hold on to their properties. To give you some idea, those who bought property in the mid-80s were paying around 25% interest, more than double the current rate of 10.5%. The rate also increased dramatically in the year 2000, again reaching figures in the mid-20s. High interest rates are not good news for anyone, but there are ways to survive the financial implications.
Start by paying as much as you can possibly afford into your bond. If possible, try to keep that payment as high as possible in order to factor in future interest rate hikes. The more money you pay in to your bond account, the better. Firstly, it shortens the period of the loan and saves you a mint in the process. At this stage, given the uncertainty, it's impossible to predict how much you will save, but to help put this into some sort of perspective think about this: If you have a current home loan of R750 000 and the interest rate is 10 percent, you could wipe around 40 months off your current home loan term by simply investing an additional R500 per month. You will also be saving a fortune in interest. Obviously, the more you put into the bond, the more you will save in the long run, regardless of how high interest rates climb. The tricky part comes in when you are dragged down by other debt or you have over extended as far as bond payments go and don't have much room to manoeuvre.
If you find yourself in this situation, the best way forward is to dump as much short term credit as possible. Focus on paying off your credit card debt and pay up and close all accounts. Compare clothing prices and buy cheaper brands wherever possible. If you’re able to, increase your car repayments until the loan is cleared and then make further additional payments into your home loan.
Cut back on the amount you pay on VAT by buying items which are zero rated. Processed food is expensive and while ditching luxury food may not be pleasant, buying and eating basic foodstuffs is not only better for your health, it will save you a fortune in the long run. It's important to live a balanced life and enjoying the odd outing to a restaurant or going to watch a movie will give you a great deal of pleasure. However, while you may not have to stop entirely, you may well have to cut back on where you go and how much you spend. When going shopping, eat before you leave home and refrain from having a meal or drink every time you visit a shopping centre. Think of it this way: the average you will spend on a coffee or cold drink is around R20, and even a bottle of water will set you back by around R18. Now multiply that by the number of times you pop into a coffee shop or restaurant each month and you may be surprised how quickly it adds up. Let's say you buy a coffee three times a week - over the course of a year this will total R3 120. Likewise, the average price of a packet of cigarettes is around R40 per pack. A person smoking a pack a day will find themselves R14 560 poorer in just one year. Alcohol is another expense that often flies under the radar. The average price of a six pack of local beer is around R50, while a reasonably good bottle of wine retails for about R70. Even if you and your partner only consume the above on a weekly basis you’ll be paying R6 240 per year for the pleasure.
Sitting back and watching interest rates climb is not a pleasant experience, but assessing your spending habits will go a long way towards keeping everything under control and ensuring that you keep your most prized possession.