"Most home-owners and potential buyers in this country are loan-dependent and therefore will require financial assistance from a lending institution in order to buy a home. As a result, the interest rate will affect most home-owners at some stage of their lives in some way," says Adrian Goslett, regional director and CEO of RE/MAX of Southern Africa.
Goslett notes that fluctuations in the interest rates can have a substantial effect on potential buyers who are entering the property market and more particularly those who already own a home.
"To a large degree, home-owners who have chosen to fix their interest rate will be less affected by any changes; however, it is important to remember that they cannot fix the interest rate for the full term of the loan. They will therefore inevitably be impacted by interest rate increases at some stage," says Goslett. "Home-owners who have kept their interest rate linked to the prime lending rate will have a reduced monthly repayment the lower the interest rate or an increased monthly repayment if it goes up."
An advantage of a low interest rate is that it provides home-owners with the opportunity to pay additional money into their bond account to reduce the term of the loan, without it having a severe impact on their monthly budget. The lower the rate, the easier it will be for home-owners to pay the required monthly repayment and add in a little bit extra.
"Although we are currently in an interest rate hiking cycle, when compared to the interest rates during the boom period, consumers are currently paying far less interest for their homes. At the end of 2008, the prime lending rate was 15%, while it is currently at 9.5%. Based on a home bonded at R1m over a 20 year term, the monthly repayment would have been around R13,167.90 in 2008, while a bond of R1m today would cost around R9,321.31 to service monthly," says Goslett.
"The interest rate directly affects the size of the bond that a potential buyer will be approved for. Lower rates generally mean that the buyer will be able to afford a larger bond, provided that all other qualifying criteria are in place. It is important for a buyer to consider whether they still be able to afford the bond if the interest increases by between 1% and 2% just to play it safe," says Goslett.
Lower interest rates will also indirectly impact the amount of disposable income which is available within a household. Considering that disposable income weighs heavily in a consumer's favour when applying for a home loan, as more buyers show affordability, demand in the property market increases. The increased demand pushes property prices up and will contribute to an increase in a home's value over time.
From an investment perspective the increased demand for property as well as the reduced monthly repayments on home loans will result in investors gaining more from their property portfolios. For example, investors who have a rental portfolio will be able to charge the same rental for their units, while paying reduced bond repayments resulting in greater profit. The less interest that is paid on an investment property annually means a lesser net return will be needed for the owner to see a profit on their initial investment.
Home-owners and potential buyers who wish to reduce the impact of an interest rate hike should reduce their debt levels as much as possible and keep them to a minimum. "Reducing debt and increasing savings will ensure that home-owners are in a better position and have some financial leeway when interest rate hikes happen. It will also increase potential buyer's chances of getting bond approval," concludes Goslett.
