The homeowners’ guide to surviving interest rate hikes

We have all seen some alarming headlines in the news over the past couple of months, surrounding interest rates, the cost of living and the likelihood of a global recession. We are all experiencing trying economic times, however, I believe potential and current homeowners should focus on what they can control and be prepared.

Read all our interest rate coverage here.

“In South Africa, growth in 2022 slowed markedly to an estimated 1.9%. The 0.2 percentage point downgrade from the June projection (2.1%) reflects the impact of rising cost of living and weakening of the terms of trade. Growth in South Africa is forecast to weaken further to 1.4 percent (downgraded from 1.5%) this year, before picking up to a still sluggish 1.8 percent in 2024,” according to the latest World Bank’s Global Economic Prospects.

Stats SA’s latest data shows that the ‘average annual inflation for 2022 was 6.9%, higher than the 4.5% recorded for 2021. The 2022 reading is the highest annual average rate since 2009 (7.1%)’.

But is it all doom and gloom?

According to Statistics South Africa, data shows that inflation slowed to a seven-month low of 7.2% in December. I also believes that we are heading towards the top end of the interest rate cycle and that there will probably be some relief towards the end of the year or early 2024.

South African Reserve Bank Governor, Lesetja Kganyago in his most recent interview with CNBC at the World Economic Forum’s meeting in Davos, said, “There is a generation experiencing high inflation for the first time. People are increasingly intolerant of inflation.” We do have some segments of the population who are not used to high inflation, many of whom did not have home loans in 1998, for example, when the interest rate hit 25%, as mentioned by the Reserve Bank Governor. In 1984/5 interest rates hit 22%. However, prospective and current homeowners need to cope financially now.

I suggests the following six considerations for prospective and current homeowners:

  • If you are applying for a bond, use a bond originator to secure the best rate. Many financial institutions continue to compete and are offering relatively favourable terms, some offering 100% bonds.
  • Buyers can choose from fixed interest rates vs variable bonds. You can only fix the interest rate on a bond for a maximum of five years, but this might make budgeting in high interest periods easier, even though your interest might be higher.
  • Consider renting a garden cottage out or running an AirBnB as additional income to put toward rising bond repayments. Use reputable agents if you are letting a portion of your property and ensure you have an airtight rental agreement drawn up.
  • Pay more than your monthly repayment into your bond. According to Ooba Home Loans you can use their Extra Bond Repayment Calculator to determine how much you save when paying extra into your bond.
  • If you have a big property, consider subdividing. This can mean you cut down on maintenance costs and make money on the land that you were not using. Put this money into your bond, if you can, to shorten the payback period and essentially the amount of interest you would be paying on the property.
  • Consider renting rather than buying. When renting a property, you know your rent is fixed for a year with an annual increase usually of 10%. You can read more on the rental market here.

Interest rates are high, but also says that things could be a lot worse. The country has experience double digit interest rates in the past and come through it. What he suggests is sound planning and decision making. If you are unsure, ask a financial advisor and real estate agent. Use tools at your disposal too, like the bond repayment calculator. Remember, we are coming off the back of a record low interest rate in 2020. We all need to keep sound of mind until the reprieve hits, which I believe will be late in the year or early in 2024.

Antonie Goosen is principal and founder of Meridian Realty.