South African Reserve Bank governor, Lesetja Kganyago announced recently at the first Monetary Policy Committee meeting of 2017 that the repo rate will remain unchanged at 7% with the prime lending rate staying at its current figure of 10.5%. Good news for consumers as the country heads into another year of predicted slow economic growth.
The interest rate and how it impacts the market
The majority of current and prospective homeowners are dependent on home loan finance to purchase a property. Because of this, any fluctuation in the interest rate will have an impact on consumers in one way or another. Stability in the interest rate will build consumer confidence and give them more time to sort out their financial situation and prepare for the year ahead.
Substantial influence on the property market
The prime lending rate has a substantial influence on the property market and potential homebuyers' ability to get their foot on the property ladder. An increase in the prime lending rate widens the gap for prospective homebuyers to meet the criteria set out by financial institutions to obtain a bond. A higher rate means higher bond repayments for buyers or having to opt for a lower bond amount. In certain instances, this could potentially push lower-income earners out of the market completely. The interest rate directly affects the affordability levels of buyers wanting to purchase property. In turn, affordability ratios will have an influence on the amount that the bank is willing to give the buyer, which could impact on the kind of property the buyer will be able to purchase.
The prime lending rate will be a driving factor behind the bank's decision process when assessing what a buyer can or cannot afford. An increasing interest rate places more pressure on buyers to reduce debt levels. Lower debt levels will increase an applicant's chance of bond approval and will make affording a home much easier.
Impact of rate fluctuations
Current homeowners are also impacted by rate fluctuations. However, this can be lessened to some degree if they have chosen to fix their rate. Homeowners with bond accounts linked to the interest rate will have to face either higher or lower bond repayments if the rate increases or decreases respectively. Where the rate remains stable and the homeowner's income increases, it will give them the opportunity to pay additional funds into their bond account and reduce the term of their loan by several years.
An additional R1000 payment a month on a bond of R1m at the current prime lending rate of 10.5% will reduce the term of the loan by almost five years. That is a 25% reduction in the term of the loan for a monthly repayment that is 10% higher. By paying extra into the bond and reducing the term of the loan, homeowners will be able to decrease the overall interest amount that they pay on their bond. The money saved on interest can be put towards retirement or perhaps a child's education.
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