Prospective home buyers have been given another “breather” when it comes to applying for a home loan – but last week’s decision by the Monetary Policy Committee (MPC) to leave interest rates unchanged should not make them complacent about buying as soon as they can.
That’s the word from Shaun Rademeyer, CEO of BetterLife Home Loans who says they should take heed of repeated warnings from economists that interest rates will have to be raised in the near future to counter the effects of SA’s investment rating downgrades by Fitch and Standard & Poor, and the two rate increase decisions that the US Federal Reserve is still on course to make this year.
This week’s decision to leave the SA repo rate at 7% and the prime rate at 10,5% for at least another two months was made in the light of the fact that the inflation rate dropped sharply in April to 5,3%, which is well below the Reserve Bank’s target ceiling of 6%.
“And at the same time,” he says, “the MPC is walking a tightrope between trying to retain the interest of foreign investors by offering relatively high rates of return on their money, and trying to stimulate local economic growth by not raising rates until absolutely necessary”.
“In fact, there was considerable speculation that the MPC might even consider a rate decrease this month to give consumer confidence and the economy a boost – and it must have been very tempting to do that, because faster economic growth leading to increased employment is one of the keys to preventing the rating agencies from giving SA any more black marks later this year.”
However, any such reduction would probably have been short-lived. Reserve Bank Governor Lesetja Kganyago has said that if the anticipated increases in US interest rates materialize later this year, they will make dollar investment more competitive – and will necessitate reciprocal increases in SA as soon as possible in order to prevent a massive outflow of capital.
“Meanwhile, the Bank is obviously also concerned about the expected rating downgrade by Moody’s next month, and further downgrades by all three rating agencies later this year, which would of course substantially weaken the Rand/ dollar exchange rate, push up the cost of fuel and other goods in SA, cause inflation to start rising again, and underpin the need for interest rate increases,” says Rademeyer.
“And such increases will put an end to many home ownership dreams, because they spell higher monthly repayments on things like cars, furniture, credit cards and store accounts – and less of the disposable income that banks are looking for when they consider home loan applications”.
“In short, once interest rates start to rise, many prospective borrowers will find that they cannot qualify for the home loans they need.”
But this does not mean, he says, that buyers should throw caution to the wind. “In fact, now is the time for home buyers to be extra-careful in their choice of property. It is essential that they allow themselves enough financial leeway to cope with future rate increases – or even better, seek help from a reputable bond originator like BetterLife Home Loans to get home loan pre-approval, so that they will know exactly what their property price range is, with some leeway built in.”
Meanwhile, existing home owners should be taking every opportunity now to pay down the capital on their home loans, Rademeyer says, so that their monthly installments don’t rise too much when interest rates are increased.