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Homeowners best be prepared as further interest rate increases loom

by | Dec 2, 2022 | Personal Finance

If you are in the market for a new property, then one of the major factors you’ll need to consider is interest rates. After a year of historic lows, it is expected that property interest rates will start to increase this year. This has important implications for prospective buyers and homeowners alike. Here’s what you need to know about the current state of property interest rates and what to expect going forward.

 

Understanding Interest Rates

Before we get into the current state of property interest rates, let’s take a moment to understand how they are determined in the first place. The South African Reserve Bank sets target rate levels that banks used as a benchmark when determining their own lending rates. Generally speaking, when the target rate level goes up, so do lending rates and vice versa.

 

The impending higher-than-expected hike

Interest rates are expected to rise 0.5% this month, but there’s a chance they might rise by 0.75%. This is according to economists and property experts who further say an increase in interest rates expected in January could push the rate to 11%, experts say. In addition, the South African Reserve Bank (SARB) is expected to hike the repo rate by 75bp this month and 50bp in January, bringing it to 7.50%.

 

How this affects homeowners

On the basis of a R1.25m price and a 20-year loan term, a 0.75% increase in the interest rate would result in an increase of approximately R620 in the required repayment by year’s end. So, given the expected interest rate increases through January 2023, customers with the average loan amount should expect their repayment amount to increase by R1050 early next year.

In this context then, there are a few things that homeowners need to consider in terms of the impact that these interest rate hikes will have on their personal finances. This may include reducing living costs wherever possible, especially in areas such as entertainment, clothing, and travel. Also, establishing budgets and tracking spending is paramount to managing your finances effectively as well as identifying lucrative savings opportunities. Failure to make the necessary adjustments to account for the increase in household debt could lend many homeowners to overindebtedness whereby they are no longer able to meet their debt obligations. Consumers are then encouraged to stay prepared so as to avoid the debt trap.

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