Interest Rate Hike: Will You Sink or Swim?

During the last meeting of the Reserve Bank’s monetary policy committee in September this year it was decided to leave interest rates unchanged for the seventh time – a decision that has made it easier for many home owners to comfortably pay their mortgages.

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.

“We 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. To my mind that’s exactly the kind of situation home owners face today”, says Jan le Roux, CEO of Leapfrog Property Group, “Whether these analysts are correct in their estimations or not, the interest rate will eventually go up and home owners who haven’t prepared for this will be caught in hot water”.

Maintaining the Status Quo, for Now

According to a report by the International Monetary Fund (IMF) the South African household debt to disposable income ratio stands at 76%, having increased by almost 30% 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.

“It would seem that many property owners can juggle their debt, maintaining the status quo for the moment but for how long?” asks le Roux, “An increase in the interest rate – which will happen eventually – possibly coupled with another electricity price hike could badly rock the boat for many”.

Property analyst for Absa Group, told IOL that, “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, “Home owners need to keep a close eye on their budgets, making sure they are prepared to weather any increase in costs.” He goes on to note that  people are more aware of this in an upward cycle but, that with the easy ride we have had as far as interest rates are concerned over the past few years, exactly the opposite has happened.

Can You Afford it?

Calculating costs versus disposable income on a monthly basis is not only the responsible move, it can also forewarn home owners 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%, 1% above prime), who have purchased a car worth R100,000 (leased over 5 years at 2% above prime).

“Should interest rates go up by as little as 1% 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.  Should no disposable income be available, as we all assume is the case in every household, this additional expense will have to come from somewhere else – less clothing, food, entertainment and travel”, says le Roux.

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