Advice and Opinion

Current rate hike a good decision says Knight Frank

The majority of those waiting for the Reserve Bank’s Monetary Policy Committee meeting held on 19th November 2015 expected the Repo Rate to remain the same and were only expecting the 25 base point increase to happen in January 2016, but the decision to increase the rate now is not a bad one, says Anne Porter, head of Knight Frank South Africa.

The increase in the Repo Rate to 6,25% will see commercial banks increasing their prime lending rates to 9,75%, and this will bring the cumulative rate hikes during the current cycle to a total of 1,25% overall.

The majority of South African households still do not save as much as they should and still tend to have a high consumption expenditure, so increasing the interest rates should help curb unnecessary spending, particularly as the festive season is approaching, said Porter.

The current household debt-to-disposable income ratio is very high (77,8%) and this causes financial vulnerability. If this ratio could be reduced, the inflation and interest rate hikes would not shock the consumer as much when they do occur.

“We can expect a slow but steady increase in interest rates over the next year and strongly advise anyone paying off a bond to anticipate this by paying in extra, if possible, each month,” she advised.

The amount that a buyer would now pay on a R1 million bond, if they had taken a 20 year loan with 10% deposit will be roughly R150 more but if an extra R350 is paid, i.e. a total of R500 more each month, there is a good “buffer” amount to help counter the increase in interest rates in the future.

Paying more than one should on monthly bond repayments is a good form of saving, as this reduces the interest on the loan as well as the overall payback time. This, together with a lower consumption expenditure each month will help keep households financially secure, said Porter.