THE PROPERTY MARKET – WHY YOU SHOULD BE INTERESTED IN INTEREST RATES

Looking back on the past two years, we are certainly living through a landmark time in history. The advent of the pandemic and its ensuing lockdowns have brought widespread economic and financial pressures. These have been exacerbated by the more recent rioting in different locations around the country.

In amongst this pressure cooker of factors, there is a glimmering beacon of hope in the realm of property. As of September 2021, the repo rate remained unchanged at 3.5% from earlier meetings of the South African Reserve Bank’s Monetary Policy Committee (MPC), with the prime lending rate of commercial banks at a 50-year low of 7.25%. This has been consistently and unanimously applied for more than a year.

What is the repo rate and how does it affect the property market? In this story, we take it back to basics – covering a quick glossary of terms to get you started with understanding the terminology and how it relates to property. We also explain the interrelationship between the repo rate and property pricing. Whether you are looking to buy your first home, are keen to move, or are thinking of buying investment properties when the time is ripe, this is the guide for you.

WHAT IS THE REPO RATE?

The repo rate refers to the lending rate between the South African Reserve Bank and private banks.

WHAT IS THE PRIME LENDING RATE?

The prime lending rate is the cost for consumers to borrow money from banks.

WHAT IS THE RELATIONSHIP BETWEEN THE REPO RATE AND THE PRIME LENDING RATE?

The prime lending rate is directly related to fluctuations in the repo rate. For banks to make a profit on their loans, the prime lending rate needs to cover the repo rate with loan costs from the bank. If you are on the market for a property, the repo rate is one of the most important considerations because of this. Unless your interest is fixed, your repayment (and, ultimately, final amount paid) will adjust to changes in the repo rate.

WHAT HAPPENS TO THE PRICE OF PROPERTY WHEN THE REPO RATE GOES UP?

• As the repo rate increases, so too does the prime lending rate.
• The repo rate affects the amount of interest consumers will pay on a loan from the bank – from bonds through to car finance and personal loans.
• It also affects the repayment amounts on bonds and loans.
• Interest bearing instruments, such as investment products, stand to benefit from such increases.

THE PSYCHOLOGY OF THE REPO RATE AND BUYING PROPERTY

Considering context – deciding whether to increase the repo rate

In determining whether to decrease or increase the repo rate, the MPC engages in a fine balancing act – one that reacts to prevailing circumstances within the country. They sit six times a year and, if you are on the market for a property, their conclusions will affect your bond application – from the numbers to expect from a bond calculator to long-term affordability.

This way up

In its simplest form, increases in the repo rate are a ‘necessary evil’ in controlling inflation. Burgeoning interest rates are off-putting to consumers because borrowing money becomes expensive. One of the reasons for increases is that slower spending helps to maintain prices and keeps inflation between the Reserve Bank’s target of 3 and 6%.

The downside to repo rate cuts

Conversely, cutting interest rates at times of upheaval is not always a match for general fear and uncertainty. In the latter context, people are less likely to borrow. The knock-on effect of this is that spending stagnates. These are the risks the MPC need to take into account around the repo rate.

Borrowing money, bonds, and boosting the economy

Borrowing is good for the economy in general and, more specifically, it is good for the health of the property market. Adjusting interest rates to encourage spending is a tactic to encourage economic recovery – something that is hot on the list of tasks for South Africa following the economic impact of the riots, the job losses and economic downturn stemming from COVID, electricity issues, local government elections and overall investor sentiment as a result.

WHAT DOES THIS MEAN FOR FIRST-TIME HOMEOWNERS?

Your foot in the door

Current low interest rates make this a great time to purchase property. The lower repo rate has a direct effect on bond affordability – making home loans more accessible to more people. For many renters, low repo rates open doors of possibility for first-time home ownership. It also creates the potential for that little (or not so little) investment property you’ve always dreamed about. If you have a reliable, steady stream of income, lower interest rates could signal your time to enter the property market.

Assessing affordability to feel at home with your repayments

The repo rate has a bearing on what your monthly repayments will be, as well as the interest to be paid on the final loan amount. If you are considering buying your first property, the attractiveness of these low rates needs to be balanced against the risk of future upward fluctuations when assessing affordability.

Where to from here?

• Keep an eye on the news for the latest announcement on repo rate changes and use a bond calculator or affordability tool to assess the impact this will have on the figures.
• Do a pre-assessment to see exactly where you stand.
• Talk to an estate agent, who can walk you through the first steps of your bond application and home ownership.
• Decide between a fixed and variable rate. A variable interest rate fluctuates with the repo rate. By default, all home loans are on a variable interest rate and fixed interest rates apply only after application on registered bonds. Fixed interest rates tend to be higher, but these are a good fit if you are averse to the inconsistency that comes with changing payment amounts.

WHAT DOES THIS MEAN FOR THOSE ALREADY IN THE PROPERTY MARKET?

Paying the price of change

As mentioned above, the repo rate affects monthly repayment and final interest amounts. As existing property owners, it is prudent to keep an eye on the repo rate to make informed decisions around your bond.

The value of your property

A consistent period of low interest rates has seen potential property owners take advantage of lower lending rates. As the demand for property rises, we can expect house prices to stabilise and improved sentiment around property in the country.

Money saved is money made

With the lower repo rate comes the decision around what to do with lower monthly repayments. Homeowners are faced with a few options:

• Keep monthly bond repayments the same, using the balance to make inroads into paying off the capital amount. This gives you an opportunity to pay off your home loan sooner.
• Use the money saved on bond repayments to service other loans such as credit card or vehicle credit agreements.
• Be clever about debt. Try to consolidate debts with higher interest rates first to maximise interest savings.

USE A BOND CALCULATOR

The numbers can be a little daunting. Use the bond calculator from Property.CoZa to get eyes on the figures – fast. These form the very foundation of your financial decisions, making this an essential tool. Find out what effect the latest repo rate announcements will have on your potential or existing bond so you can plan for the future.

START PLANNING WITH AN AFFORDABILITY CALCULATOR

The joys of property ownership hinge on one vital factor: affordability. With so many factors to consider, assessing the affordability of your next (or first) property is one of the most important steps you will take in the build up to purchase. The ease of the process and the success of the outcome are influenced by the quality of your tools – and the team you have by your side. Use the intuitive, intelligent affordability calculator from Property.CoZa so you can manage the number crunching with ease to accurately assess affordability criteria.

GET A FREE PRE-ASSESSMENT

If you’re not sure whether you qualify for a bond, a free, obligation-free pre-assessment interrogates the reality of owning your dream property.

TALK TO AN ESTATE AGENT

Real estate is a multi-faceted world and estate agents are here to guide you through the process of purchasing your first property. Search our curated database of knowledgeable property professionals by area to get a friendly helping hand throughout the property-buying and selling process.

PROPERTY.COZA: WORK WITH PROPERTY SPECIALISTS

Take your interest one step further by chatting with one of the agents from Property.CoZa. We are here to provide helpful resources, clever tech and tools, and access to the country’s leading real estate agents from one helpful hub. Get in touch with us to discuss your property plans. Whether you are looking to buy or sell a property, contact us for leading property solutions today.