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Home loans and interest rate hikes

20 Nov 2013

During the last meeting of the Reserve Bank's monetary policy committee in September this year, it was decided that the rates would be left unchanged for the seventh time - a decision that has made it easier for many homeowners to comfortably pay their mortgages.

"Should interest rates go up by as little as one percent as predicted toward 2015, an average consumer with this kind of income could find themselves with a lot less to spend per month - with any previous surplus now going into bond payments.”

"This is set to change with many analysts telling Business Day that they predict that Reserve Bank Governor, Gill Marcus, will raise the interest rate by 50 basis points over the next eight months and a further 100 points by July 2015," says Jan le Roux, CEO of Leapfrog Property Group.

He says they all know the analogy of placing a frog in hot water - it jumps right out. Place it in cold water, heating it slowly and you've got frog stew, he says, and that's exactly the kind of situation homeowners face today.

"Whether these analysts are correct in their estimations or not, the interest rate will eventually go up and homeowners who haven't prepared for this will be caught in hot water".

According to a report by the International Monetary Fund (IMF) the South African household debt to disposable income ratio stands at 76 percent, having increased by almost 30 percent between 2002 and 2009. Add to this the National Credit Regulator's data, as reported on IOL, showing that almost half of all credit holders have impaired records and a worrying image starts to emerge.

Le Roux says it would seem that many property owners can juggle their debt, maintaining the status quo for the moment but for how long? He says an increase in the interest rate, which will happen eventually, possibly coupled with another electricity price hike, could badly rock the boat for many.

He says a property analyst for the Absa Group says, “at the stage when interest rates increase, we'll have a further negative impact on the consumer. One has to accept that defaults will start to move."

Le Roux believes that it all comes down to affordability and planning. He says homeowners need to keep a close eye on their budgets, making sure they are prepared to weather any increase in costs.

He says people are more aware of this in an upward cycle but, that with the easy ride they have had as far as interest rates are concerned over the past few years, exactly the opposite has happened.

Calculating costs versus disposable income on a monthly basis is not only the responsible move, it can also forewarn homeowners of any possible risks when it comes to honouring their mortgage repayments.

Take a look at this affordability model, based on a married couple with a joint income of R20 000 who have two kids, own a house with a bond of R670 000 (at 9.5 percent, one percent above prime) and a car worth R100 000 (leased over five years at two percent above prime).

"Should interest rates go up by as little as one percent as predicted toward 2015, an average consumer with this kind of income could find themselves with a lot less to spend per month - with any previous surplus now going into bond payments.”

Le Roux says should no disposable income be available, as they all assume is the case in every household, this additional expense will have to come from somewhere else - less clothing, food, entertainment and travel.

As such he advises homeowners to pay as much as possible into their mortgages while they are still able to thereby decreasing their overall debt now, before the water gets too hot.  

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