How will the rate rise affect Home owners and buyers?

How will the rate rise affect Home owners and buyers?

An expected 0,25 percentage point increase in interest rates was announced today by Reserve Bank Governor Lesetja Kganyago in response to steep inflation increases in the past two months as well as the continuing weakness of the rand and the ongoing drought.

It was the third successive increase, with analysts expecting several more in 2016 amid a challenging economic cycle in the country.

"Given upside risks to inflation forecast and the protracted period of the expected breach, MPC decided that further tightening was required," said Lesetja Kganyago, governor of the Reserve Bank of South Africa.

This increase will take the repo rate – the rate at which the Reserve Bank lends money to the commercial banks – to 7% and the prime rate and variable home loan rate to 10,5%.

These changes will translate, for homeowners, into an increase of about R136 a month on a 20-year home loan of R811 000 – the current national average approved bond amount.

The difference for first-time buyers will be R104 on the average home loan of R622 000 that is currently being approved in this sector of the market, notes BetterLife Home Loans CEO Shaun Rademeyer.

"The increase will also mean that prospective buyers are going to find it more difficult to qualify for home loans now, even if they are able to borrow at prime," he says.

"The banks have already become more cautious lenders since the 0,5 percentage point increase in rates in January, and will also be looking for borrowers to have more discretionary income now to cover a home loan repayment, after all other debt repayments and regular expenses have been covered.

"However, with the drought pushing up food prices, electricity tariffs sent to rise by 9,4% next month and the instalments on cars, credit cards and other debts increasing because of the increase in interest rates, this is going to be very difficult for prospective buyers to achieve.

"Consequently, we expect buying activity in the real estate market to continue to slow, especially among first-time buyers who are the most credit dependent."

Rademeyer also suggests that in response to the latest interest rate move, all homebuyers should now be looking to come to the table with bigger deposits, as this will not only make it easier for them to qualify for a loan, but lower their monthly home loan instalments and protect them against further rate increases.

"In addition, they really should obtain pre-qualification for a home loan before they start looking for a property, so that they know what they can realistically afford. They should also make sure they apply for their loan through a reputable mortgage originator as this will give them a much better chance of securing an approval.