Ready yourself now for a rates rise in the future

Private Property South Africa
Martin Hatchuel

Interest rates are unchanged... for now. Here's how to prepare yourself in advance for when they do inevitably rise.

The South African Reserve Bank’s first Monetary Policy Committee meeting of 2015 delivered the goods: interest rates will remain unchanged for the foreseeable future, even though the bank’s governor, Lesetja Kganyago, had previously said that the bank was in rates hiking cycle. Which means that now is probably a good time to prepare for when they do.

The reasons for maintaining the status quo - the repo rate at 5.75%, the prime rate at 9.25% - aren’t hard to fathom. As Adrian Goslett, CEO of RE/MAX of Southern Africa, pointed out: “falling fuel prices and the easing of food prices have served to improve the inflation outlook.

“With the price of crude oil dropping as much as it has, inflation has remained well within the target range, alleviating the need to hike the interest rates.” He said, too, that the fact that the interest rate will remain at its current level while the price of fuel price is declining will provide some degree of relief for homeowners - which should allow them to “pay down debt or pay additional money into their bond accounts.”

INCREASE BOND REPAYMENTS

“One of the best investments that homeowners can make is to pay off their home loans faster, which reduces the amount of interest you have to pay over the term of the loan.

“Although many homeowners may think that paying off a home faster it is an extremely difficult task - especially with a very tight budget - a few simple financial adjustments can make a large impact,” he said.

He noted that you can reduce the term of your home loan by paying a little more on the required monthly installment.

“An increase of just R 500.00 on a bond of R 1 million at an interest rate of 9.25% can save you R 185,719.91 in interest, and will cut the term of the loan to 17 years and 4 months.

“If you were to pay an extra R 1,000.00 on a bond of R 1 million at prime, you’ll save R 316,703.87 in interest, and reduce the term of the loan to 15 years and 5 months.”

PREPARE FOR A BOND RATE DROP

Situations change, and despite Governor Kganyago’s predictions of increases in 2015, the repo and interest rates could conceivably drop this year.

“If fuel prices continue to fall and inflation remains low, we could see the interest rate drop at some stage during 2015,” said Adrian.

In which case, he said, simply continuing to pay your bond at the old, higher level will help to reduce the term of your loan “because the extra money will go into your bond account, without affecting your budget.”

BUT WHAT IF IT RISES?

Jean Cronje, an agent at Carr Real Estates in Olivedale (Randburg), said that homeowners should see any improvement in the present economic climate as an opportunity to prepare for the future.

“It’s true that we might have some extra disposable income now, but if you want to protect your investment, it’s probably best to look at the bigger picture.”

She recommended that you begin planning for a future rise in rates by working out what such a rise might cost each month (easily done online: see our bond calculator at PrivateProperty.co.za) - and what that might mean to you in terms of affordability (see our affordability calculator here).

“Some of us might be able to afford a small interest rates increase, but many people could struggle if they go up by 2 or 3 percent,” she said.

“You might not feel like doing it, but now is the best time to look at cutting back on what you spend on almost everything except your bond.

“Like the squirrel who hoarded for the winter while the rabbit ran around having a ball in summer, a little forward planning now could save you from finding yourself in trouble down the line.”

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