On Thursday, the South Africa Reserve Bank monetary policy committee announced a much-anticipated interest rate drop of 25 basis points. The decision – in line with most financial analyst’s predictions – takes the repo rate to 6.50% and the prime lending rate to 10% for the first time since November last year.
While the cut triggered a notable strengthening in the rand within hours, opinions are divided on how much real relief it will offer consumers. Tony Clarke, MD of the Rawson Property Group, is conservative in his predictions, saying now is the time for homeowners to consolidate and pay off debt, rather than overextend.
“There is no doubt that this interest rate cut will create some breathing room for homeowners who are facing extreme pressure on their household budgets,” says Clarke. “However, the negative economic factors like poor GDP growth which necessitated the Reserve Bank’s decision to begin with mean South Africans are still in for a difficult financial road ahead.”
This, together with the possibility of future fuel price hikes and ongoing cost-of-living increases, will detract from the tangible benefits consumers may see from the lower interest rate. As a result, Clarke highly recommends property owners who are able to do so continue paying the same amount into their home loans, regardless of any reduction in their minimum repayments.
“A 25 basis point decrease means your average homeowner with a R1 Million bond will save just over R160 a month on their monthly repayments,” says Clarke. “That’s unlikely to make a huge dent in daily expenses, but putting it back into the bond every month could save over R70k in the long run and knock a full year off the total loan term.”
While this may not be the immediate outcome homeowners were hoping for, Clarke says it’s not all doom and gloom for the property market in the meantime.
“A drop in interest rates, no matter how small, does stimulate demand for property,” he says. “This will help strengthen the market after its recent contraction and support a return to positive – if slow – house price growth. There is also a chance that the Reserve Bank’s actions could influence ratings agencies like Moody’s to upgrade South Africa’s credit rating, and the resulting increase in foreign investment would have a positive knock-on effect for the value of property.”
This potential for a market turnaround, coupled with currently modest property prices and another interest rate cut on the cards within the next 12 months, paints an attractive picture for prospective property investors. With lenders under pressure to meet targets, Clarke says buyers are also receiving very competitive mortgage rates, making now the ideal time for those with the means to get in at the bottom of an upswing.
“I certainly wouldn’t recommend biting off more than you can chew in the present economic climate, but using this time to buy low and pay off as much debt as possible will put new homeowners in a strong position for the future,” he says. “Those not able to buy just yet should also consider this the perfect time to minimise debt and boost savings in order to take advantage of the significant benefits of having a sizeable deposit in hand when they’re ready to hit the market.
“In the meanwhile, existing homeowners can take comfort in the fact that their property values are increasing, their strength on the market improving, and interest rates are unlikely to hold any nasty surprises in the near term.”