Reserve Bank Governor, Gill Marcus announced yesterday, 27th March at the second Monetary Policy Committee meeting of this year that the prime interest rate would remain at its current rate of 9%. The repurchase rate remains unchanged at 5.5%. This is very good news for current property owners, as well as those who aspire to home ownership in the near future, says Adrian Goslett, CEO of RE/MAX of Southern Africa.
He notes that while the choice was made to keep the rates at their current levels for now, the weakness in the rand is still placing pressure on the Bank to further increase rates at a later stage. With the primary responsibility of the Reserve Bank to keep inflation within its target bracket and exchange rate pressures intensifying, it is likely that we will see another rate hike in the near future. Inflation is expected to move into the upper end of the target range in the second quarter of this year.
The fact remains that most home buyers in the current market environment are loan dependent and will require finance from a bank to purchase their property. Essentially this means that these buyers will be affected by any fluctuations in the prime lending rate. Even if homeowners choose a fixed interest rate for their bond, the rate given by the financial institution will be based on the current prime interest rate. While 9% is still a highly favourable rate, given the much higher rates seen during the boom period, further rate hikes are expected during this year. This could negatively impact the property market as many consumers are already dealing with high levels of debt and the rising cost of living expenses. Goslett points that regardless of fluctuations in rates, the year ahead will be tough for consumers with petrol, food and utilities all on the rise. This will put pressure on family budgets, which in turn will put pressure on home loan repayments.
Additionally the increased cost of credit over the past months from the previous rate of 8.5% is bound to put more stress on both existing homeowners, as well as new applicants applying for finance. The interest rate directly impacts on the affordability levels of would-be homeowners. With an extremely high emphasis placed on affordability ratios by banks, any further hikes will make it far more difficult for many potential buyers to get their foot into the property market.
Apart from approval being a factor when it comes affordability ratios, it will also influence the amount the bank is willing to finance. Higher rates could translate to lower bond amounts, affecting the kind of property a buyer will be able to purchase. For this reason, potential buyers are urged to pay down debt as much as possible in order to increase their chances of obtaining higher bond amounts and affording a home far easier.
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