Is The Interest Rate Party Over?
At the last meeting of the South African Monetary Policy Committee (MPC) on 11th November 2020, is appears that the interest rate party may be coming to an end. The repo rate remained at 3.5% and the Governor of the Reserve Bank, Lesetja Kganyago, indicated that there is no provision for further interest rate cuts in the near future, warning that increases should be expected in the last part of 2021.
‘Some people may be considering fixing their home loan interest rate,’ says Sandy Walsh, Managing Director of Property.CoZa, ‘which seems smart at these low rates, however this may become a risk, should there be a further cut in 2020 and fixed rates are generally higher than the prime rate.’
To provide some perspective, the stress put on the South African economy in the second quarter of this year and the anticipated lowered GDP of 8.2% this year, reported by the Reserve Bank, even lower that its earlier forecast of 7.3%, does not bode well for recovery. However, the outlook for inflation appears to be stable and the MPC did not allude to an inflation adjustment, although there do not seem to be any further measures bolster the lagging economy. Kganyago said that the only way forward is by implementing prudent macroeconomic policies and structural reforms that lower costs generally, and increase investment opportunities, potential growth and job creation.
Over 300 basis points have been cut from the interest rates in South Africa and this has improved the affordability of a new home loan for many first-time borrowers and reduced the cost for existing bond holders. This year has been particularly interesting with a huge change from the beginning of 2020 to the present, for instance, a new mortgage bond at prime rate for R2 million will cost a new lender R3 800 less each month than a lender who applied for a loan at the beginning of 2020.
To return the potential of fixing a home loan interest rate, it is important to bear in mind that a fixed rate is likely to be higher than the current floating rate, which may add some initial financial strain to the bond holder. It’s also important to establish the term of the fixed rate, in other words, the bank will quote on a fixed rate they are prepared to offer on a given day, as they are quite variable and constantly adjusting their interest rate outlook. The bank will generally fix an interest rate for a period of five year and renegotiate this fixed rate at the end of the term. If the applicant wishes to extend this period, it is likely that the interest rate will be fixed at a rate even higher.
‘There is a sense of comfort from having a fixed interest rate loan, as the bond holder is assured of the amount to pay each month, especially as this is normally the greatest household cost each month,’ says Walsh. ‘The flipside is that being locked into a fixed rate may mean that you are paying a much higher interest rate for a long time, and there is no option to enjoy lower rates if the interest rates remain low or if the rates are lowered even further.’
It’s interesting to know that Kganyago indicated that no more rate cuts are planned for 2020, however, the MPC votes were not unanimous and two of the five MPC members were in favour of a further 25 basis points cut. This sentiment is shared by the FNB chief economist, Mamello Matikinca-Ngwenya, who feel that there is still scope for a further 25 basis points this year.