How to survive the higher interest rate

The Reserve Bank hiked the repo rate again on Thursday and many consumers are wondering how they will survive.

They now have to tighten their belts even more to meet bigger debt repayments and smaller spending budgets.

People now think back to the time in 2021 when interest rates were so low that they could stretch their budgets to afford their dream cars or houses. They could not have predicted that there would be nine interest rate hikes within two years and that they would pay more than they bargained for.

The same applies to all other debt, good or bad, including your bond, personal loans or credit cards, says John Manyike, head of financial education at Old Mutual.

“For example, someone who bought a house for R1 000 000 over 20 years and paid a R100 000 deposit would have been paying R9 137 a month. With the latest rate increase, this would increase to R9 598 (or an extra R461) a month. This is enough to upset an income already balanced on a knife’s edge.”

He says it is time to take strict personal measures as there are signs of more interest rate hikes.

“The best you can do, especially if you already spend most of your salary repaying debts, is to formulate a budget and try to stop any wastage to ensure you can focus on reducing debt and diversifying your income stream.”

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Get a side hustle

“One of the most underrated solutions to a volley of interest rates squeezing your disposable income is a side hustle. Net salary increases do not match the inflation rate which means people become poorer and more highly indebted. No matter how hard you try to stick to your monthly budget there might be no room to manoeuvre. Therefore, any advice encouraging people to stick to their budgets might not be the ultimate solution.”

Manyike says it is high time that people research alternatives streams of income to save for rainy days, reduce debts and create wealth. There is no harm in consolidating debts if push comes to shove but you must understand the financial implications.

He also warns that payment holidays in this interest rate cycle are not ideal because no one knows how long the piece of string is. “The high interest rates should also teach us that we must think differently about why we borrow money or spend on items we do not need with money we do not have. Increases are always possible, so balancing your budget and future proofing your finances should be a priority.”

To be ready for the unexpected, Manyike urges consumers to:

• have a budget and always have some money ready to cope with the unexpected, such as interest rate increases;
• consider the total cost of a loan and the interest rate rather than the monthly payment. For example, a major retailer currently offers a 55-inch TV for a cash price of R 7 999, but on credit, this means R370 a month for 36 months or R13 301 because the interest rate is 21.75%. Is paying an extra R5 302 for a TV worth it?;
• buy down instead of up. Even if you buy in instalments, buying at a price below the maximum you can afford means you will not be stressed if rates increase. Also, it means you can pay more each month for the item, pay for it earlier and save on interest.

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How homeowners can cope with higher interest rates

Homeowners all over South Africa are feeling the pinch as interest rate hikes take their toll. Most homeowners are finding that they need to cough up thousands of rands more each month to meet their bond repayments.

Sadly, the worst is not over, says Corné Welman, franchise principal and certified financial planner at Consult by Momentum. “More interest rate hikes are on the horizon and for people who earn a fixed income, finding an extra R10 000 every month to meet your bond payment is not easy, as our salaries generally do not increase at the same rate.”

She says it is important to know options are available to help alleviate some of the financial pressure but firstly, it is important to understand what causes the current interest spike that affects everything, including your car, credit card and clothing account repayments.

“During the 2020 lockdown, the relationship between supply and demand was significantly disrupted. Demand for certain goods and services dropped during lockdown because people could not buy them, while many people saw their income take a knock due to reduced working hours or retrenchment. As a result, interest and inflation rates remained low. People looking to buy a house could do so relatively affordably.”

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How inflation pushes up interest rates

Inflation since ramped up due to several factors due to factors such as the energy crisis and the repo rate was increased by 400 basis points. “If you bought a house for R2 ,5 million in 2020, your bond repayment might have been around R20 000 per month, depending on the repayment period and the rate granted by the bank. Fast forward to 2023 and you now pay close to R28 000 each month on that same bond, an additional R8 000 that you would need to find somewhere.”

However, she says there is a silver lining. “If you are considering buying a house and can comfortably afford the repayments, now is actually a great time to do so. The rates will drop soon, leaving you with more disposable income. If you are really clever, you would keep your bond repayments the same as what you would pay at the peak of the interest rate cycle, which would allow you to pay off your home a lot quicker.”

Welman’s advice is to ensure there is enough buffer in your budget to provide for possible interest rate hikes. She also urges consumers not to stick their heads in the sand and stop paying while ignoring the bank’s calls.

“Be proactive about the situation and reach out to your bank before missing a payment, while your credit standing is still good. Sometimes banks are open to renegotiating the interest rate they offer you on your mortgage, which might save you a couple of thousand rands each month.”

She also says consumers should review their budgets to make more funds available for their bond repayments and consider extending their bond repayment periods, which will bring down monthly payments, but this should be a last resort. “I would suggest that you first try to see where you can cut to make the current loan repayments. Extending the mortgage period means that you will be paying for your home for a longer time and paying more in interest.”

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Be serious about home insurance

“Home insurance is very seldom an optional extra in South Africa. Owning a home comes with risks and to get a home loan banks insist you have adequate cover. You must ensure your home insurance works for you and you get the most value from it,” says Attie Blaauw, Santam’s head of personal lines underwriting.

 “It is crucial to consider the cover each policy provides. While a cheaper premium may sound appealing, you will need to be sure that the policy adequately covers your home and valuable possessions.”

Blaauw shares these tips on how best to find affordable home and personal insurance and how to maximise it to reduce the interest rate impact on your budget:

• Budget for potential rate hikes: When interest rates increase, your bond repayments also increase. You can avoid the financial strain by building a reserve with additional funds added to your savings or flexi bond when interest rates are more favourable or lower. That way, you will have enough funds to cover any increases that may arise over the years.
• Save costs with combined insurance: Some insurance providers offer insurance bundles that cover your building, contents and cars combined. This can work out be much more affordable than paying for three separate insurance products.
• Explore value-added services: Savings are not always obvious from your monthly debit orders. Some insurance providers offer discounts, free services and other great value additions, such as free value-added benefits like home emergency assistance, roadside assistance and home drive assistance.
• Shop around for affordable home insurance: Most banks require homeowners to have property insurance before extending a bond. However, after moving in, you might not have given your insurance premium a second thought. It could be worth re-evaluating your insurance and comparing quotes from different companies to find a more affordable home insurance option. You are not obliged to stick with the original insurance company, even if it is the one provided by the bank that gave you the loan.
• Increase your excess. A smart move to save on your monthly insurance costs is to consider increasing your excess. By opting for a higher excess amount, you can potentially lower your monthly insurance premiums. However, it is essential to make sure you can actually afford to pay that excess in case you need to claim.
• Ensure your coverage evolves. As your life changes, your insurance needs change too. If you downscaled your home, moved to a new place, or sold off some valuable items, it is important to adjust your insurance coverage accordingly. By doing so, you might find that your monthly premiums become more budget-friendly and personalized.
• When in doubt, speak to your insurance broker.