How much more you will pay on your bond after South Africa’s latest interest rate hike

The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) decision to hike the repo rate by 50 basis points to 4.75% – taking the prime rate to 8.25% – will make home loan finance more expensive.

However, the rate remains well below the pre-pandemic levels of 2020 and was expected and factored into the market outlook for the year, says Samuel Seeff, chairman of the Seeff Property Group.

“We should now be aware that we are in a hiking cycle as the SARB looks to normalise the rate – and there is a further 100bps in hikes expected this year. Challenges for the economy include the CPI which, although unchanged, remains at the upper target range while the rand has come under pressure.

“The low GDP growth outlook could potentially be further impacted by the electricity crisis, fuel and food price hikes, supply constraints and fall-out from the Russia war in Ukraine,” Seeff said.

Although homeowners and property buyers need to adjust to higher home loan repayments, the reality is that the interest rate should remain below the pre-pandemic level. “Beyond the further 100bps, we do not anticipate any further impact on the interest rate,” Seeff said.

Given the fragile state of the local economic recovery, with high unemployment, rising poverty levels and household finances under pressure from rising prices, one could argue that any increase at all in the repo rate would over-burden consumers and further dampen the economy, said Dr Andrew Golding, chief executive of the Pam Golding Property group.

This is particularly so given the toll that persistent load shedding and the recent KwaZulu-Natal flooding are taking on the economy, he said, adding that there is also a risk of another significant hike in the fuel price in June as the government’s temporary R1.50 per litre general fuel levy subsidy ends.

“We had hoped that any increase would be only 25bps, not the 50bps widely forecast. In addition to the weak economy, the case for hiking by only 25bps was further supported by the fact that core inflation remains below the mid-point of the Bank’s inflation target at just 3.9% in April, while the headline inflation rate remained unchanged at 5.9% last month – marginally below market expectations and just within the upper limit of the inflation target,” said Golding.

Golding said that the impact on the residential housing market is not expected to be significant, especially as this is still the lowest level of prime interest rate (now 8.25%, up from 7.75%) in more than two decades – prime was last 8.5% between July 2012 and December 2013.

For example, for a homebuyer with a bond of R1 million over 20 years, and a prime rate of 8.25%, payments will increase from R8,209 per month to R8,521.

Seeff said it remains an enjoyable time to buy.

Deposit requirements are now as low as 6% to 7% with home loan finance more accessible as the banks continue competing strongly. Mortgage originator, Ooba also reports that 60% of its approved mortgage bonds in the first quarter were above the R1.5 million price level.

Seeff said the market remains well-balanced in terms of sufficient supply to meet buyer demand with some exceptions in the high demand price bands and areas. At the same time, house price growth has slowed to around 4% on average – slightly higher in the lower price bands.

The advantage of the flat price growth is that there is still excellent value in the market, especially at the higher price bands and buyers should take advantage. Sellers will, however, need to price realistically or they could miss out on the favourable market phase.

“We were hoping for a more moderate 25 basis point hike, but the 50-point increase wasn’t entirely unexpected,” said Tony Clarke, MD of the Rawson Property Group. “Between the weaker rand, rising international interest rates and massive fuel price hikes on the horizon – which will likely push inflation over the SARB’s 6% upper limit – there was little else the MPC could reasonably do.”

This is highly unlikely to be the last interest rate increase in the short term, either. Economists are predicting several more hikes this year with upper estimates pegging prime at 9.5% by December, he said.

“We do expect a slight drop in demand with a corresponding increase in stock levels,” said Clarke. “Buyers will be extremely demanding and cost-conscious and not afraid to push their luck during negotiations. Sellers will need to take this into account when positioning their properties, leaning on the skills of property professionals to compete effectively.”

Clarke said that there could also be an increase in urgent and/or distressed property sales as people who previously bought at the limit of their affordability feel the pinch of higher interest rates. This, together with the general perception of a less favourable property finance landscape, could see some expansion of the rental market’s tenant pool.

As a result of the latest rate hike, and based on a housing bond at the base rate over twenty years, homeowners and property buyers will need to budget for an extra: