Repo rate: R2.5m bond? You could be paying R7 700 more monthly

Thursday’s 50 basis points (bps) repo rate hike means the wallets of already strained consumers are yet again being hit hard, especially those who have home and vehicle loans as the cost to finance their debt is immediately pushed higher.

The South African Reserve Bank (Sarb) held its third Monetary Policy Committee meeting of the year on Thursday and decided to raise the repo rate to 8.25% – pushing the prime lending rate of commercial banks (used to lend to consumers) to 11.25%.

The hike was the 10^th since the Sarb commenced its hiking cycle to curb sticky inflation 18 months ago. Since then the repo rate has risen by a combined 450bps, from a Covid-era record low of 3.5%.

The ripple effect of the increases means consumers are now paying as much as 40% more to finance their home loans compared to September 2021.

ALSO READ: ‘We are in deep trouble,’ says economist after repo rate increase sends rand crashing

Oh, how things have changed …

Homeowners holding a 20-year bond worth R2.5 million will now pay R27 093 at the new prime rate of 11.75%, translating to R7 711 more since September 2021.

FNB senior economist Siphamandla Mkhwanazi tells Moneyweb the hike is piling more pain on consumers, with overall debt servicing costs set to increase at more accelerated levels than previously expected.

“In the last two quarters we [saw] the consumer actually [going] outside of the banking sector to get … credit, which tends to be pricier,” he says.

“All of this means that we might see the overall debt servicing costs increasing at a much faster pace,” he said.

ALSO READ: Repo rate up by 50 basis points – highest since 2009

David Jacobs, regional sales manager for Rawson Property Group, says the latest increase could see monthly bond repayments tip some homeowners over the edge of affordability, with first-time homeowners hit the hardest.

“Established homeowners who are a fair way into their loan term will hopefully have a little more financial wiggle room, with several years of income growth behind them.”

He adds that more recent buyers, especially those who purchased at the peak of their affordability during Covid’s record-low interest rates, have not had the benefit of time to grow into their bond repayments.

“Distressed sales are increasing, but it’s important for homeowners to realise that this isn’t their only option,” says Jacobs.

“Banks are generally very willing to compromise in order to help otherwise-responsible bondholders through periods of heightened financial distress.”

ALSO READ: More repo rate pain for South Africans expected this week

Managing debt will become a challenge going forward, says Adrian Goslett, regional director and CEO of RE/Max of Southern Africa.

“Every interest rate hike reduces consumers’ spending power and their affordability levels get placed under further pressure.

“Most experts were hopeful leading up to the March announcement that the hiking cycle might be near its end. The current sentiment seems to point to this being the last hike in the cycle, but there is no guarantee of this as inflation continues to fluctuate from meeting to meeting,” says Goslett.

This article originally appeared on Moneyweb and was republished with permission.
Read the original article here.