The recent increase in the Repo rate shouldn’t have come as a surprise, really. It is the third such increase this year, raising the base rate by 75 basis points – or 0.75%. For anyone with debt, an increase in the interest rate isn’t great news.
That translates to an extra R 170 per month per million Rand borrowed on a home loan over 20 years.
However, when you put the current interest rate into context, consider how much lower rates are now than they were in the 1990’s. I can remember the days when the home loan rate was well over 20%, and climbing.
For many years we were used to a rate hovering between 12% and 15%. What a pleasure when rates dropped below 10% for the first time in ages – and it’s something we’ve got used to. Sadly though, it doesn’t seem set to last, at least not for a while.
Economic indicators don’t paint a pretty picture for the country. A slowing economy, drastically weakening Rand, and government policy that is not investor-friendly, all point to tough times ahead. Unless the fundamentals change we can expect to see the Rand continue it’s slide, and interest rates continuing their move upwards.
So how does that impact you and owning property? History has shown that property ownership is a solid long-term investment. Unlike most other investments, you can enjoy the tangible benefit of living in your property investment. And that’s a much better prospect than paying an escalating rental on someone else’s investment.
The prudent course though, is to factor in higher interest rates when determining what you can afford to purchase. In many cases the banks qualify a purchaser on an interest rate 2% higher than the current rate – thus ensuring the purchaser will be able to service their debt if interest rates increase.
It is good practise to take the same approach when calculating your affordability on any debt that you take on – such as purchasing a vehicle or taking out a personal loan.
It’s also prudent not to assume that your salary will continue to increase at the same rate it may have increased over the past few years. There could well be tough economic times ahead. Cast your mind back to 2008 / 2009. Could you survive another global financial crisis? If you live well within your means then you are acting wisely and will be well prepared should the economy take a turn for the worse.
That doesn’t mean a global crisis is inevitable. But what it does mean is that it’s a possibility. And global crisis aside, this country needs to make some significant policy changes soon if our economy is going to recover and avoid the downward path it’s headed on.
So invest in property – it’s as safe as “houses”. But factor in interest rate increases as we will probably be in for more of the same in 2016.
Principal of Harcourts Platinum
Director of Harcourts South Africa