Interest rates could become a millstone

The hike in interest rates at the end of January did not come as welcome news for home bond holders and the prospects of further hikes in the Base Rate by the Reserve Bank cannot be ignored.

The Reserve Bank increased the Base Rate ( the rate it charges commercial banks for money) by 25 basis points resulting in the cost of borrowing money increasing.

This came after December's consumer inflation rate was measured at 5,9%, close to the upper limit of the Reserve Bank's inflation target of 6%.

In real terms this pushed up the Prime Lending Rate (that which banks in turn charge their best customers for borrowing money) up to 7,5%. The effect of this is that house bond repayments also become more expensive - a R1million bond will now cost R8056 instead of R7904, or a monthly increase of R152.

But if households can afford a larger repayment of their bonds, they stand to benefit immensely in the long term. Repaying a R250 000 bond by R79 a month could save the bondholder nearly R20 000 over the 20 year life of the bond.

The interest rates rose because of inflationary pressure and inflation is a measure of rising prices of goods and services. Normally inflation happens when production costs increase. It is also directly affected by higher fuel prices, as well as increases in raw material and wages.

A surge in demand for products and services can cause inflation as consumers are prepared to pay more for the product. This happens when there is more money chasing fewer goods - also because of rising food prices and fuel prices.

In South Africa's case regulated administered prices such as electricity and water tariffs, as well as government wage settlements posed a risk to the inflationary trajectory. The fuel price, which has risen significantly to over $100 a barrell due to the Russian invasion of Ukraine is a major factor.

Despite the hike in January and other increases expected at the end of each quarter, property economists believe the South African property market is still the best buyer's market in decades. This situation is supported by bank lending which remains the best in over 10 years with higher loan-to-value bonds available and first time buyers still able to secure 100% bonds.

Home loan approval rates were up by 3.1% in the fourth quarter of 2021 compared to the same period in 2020, according to data compiled by bond originator ooba Home Loans.

But in spite of all this the rate-hike cycle signals that buyers and homeowners should exercise caution and they must factor in these considerations when determining their budgets.

"The SARB's decision to adjust rates is a sign of recovery in the underlying economic activity. The mitigation of inflationary pressure by normalising interest rates provides South Africa with a path to transition from the emergency measures implemented over the last two years," said FNB chief executive Jacques Celliers.

"Furthermore, normal operating conditions will be conducive to broad-based economic recovery that will also benefit sectors that are disproportionately impacted by the pandemic. Our country needs to take deliberate steps towards full recovery after two years of remarkable resilience. We're certainly encouraged by the enthusiasm of our retail and commercial clients to unlock growth opportunities."