After the five aggressive repo rate cuts last year that dropped the prime lending rate to a historic low of 7%, homeowners and aspirant buyers have been holding their breath, waiting for the pendulum to swing the other way in 2021. But expert predictions suggest that interest rates will remain low for a while yet, with the first significant hike only expected next year.
“While the current favourable lending environment has resulted in a massive surge in buyer activity, with BetterBond reporting a 24% increase in bond applications volumes for March, year-on-year, consumers must look at projections for the next three years so that they can plan and budget accordingly,” says Carl Coetzee, CEO of BetterBond. “Now may well be the best time to bond, but homeowners also need to be prepared for what happens when interest rates increase again.”
FNB’s senior economist, Siphamandla Mkhwanazi, argues that there may well be a good few months still to apply for a bond at the current low prime lending rate, suggesting that the rate’s cycle outlook may be even rosier than initially expected. “The South African Reserve Bank’s (SARB) Quarterly Projection Model’s (QPM) implied policy rate path is for a cumulative policy rate increase of 50bps this year: 25bps in the second quarter of 2021 and another 25bps in the fourth quarter. We however do not see the second quarter’s QPM’s policy rate increase materialising, and we believe the Monetary Policy Committee (MPC) will delay the fourth quarter policy rate increase envisaged by the QPM and will likely only start to hike interest rates, albeit within limits, in 2022.”
Mkhwanazi goes on to say: “We expect only one 25bps hike through the forecast horizon (through to 2023). We believe the hiking cycle will be gradual at best, and rates will likely remain low for a long time.” He adds that the March decision to hold the repo rate steady at 3.5% suggests that the SARB has reached the end of its cutting cycle.
The surprise turnaround of the residential housing market is undoubtedly one of the few good news stories to emerge from the pandemic, says Coetzee. “In a bid to provide some financial relief to cash-strapped consumers, grappling with salary cuts and job losses during lockdown, the South African Reserve Bank aggressively cut the repo rate five times in 2020, taking the prime lending rate to a historic 7% – the lowest it has been in five decades.”
Adds Coetzee: “While it may be difficult to foresee what the future holds in terms of the rates cycle, we do know that historically the increase in the repo rate is gradual.” If one works on the SARB’s more measured projection of two repo rate increases of a modest 25 basis points in the second and fourth quarter of this year, the year would still end with the prime lending rate at a very comfortable 7.5%, says Coetzee. “This is still a record low for consumers, and on a R1 million bond over 20 years, would work out to about a mere R300 increase on the bond’s monthly installment.”
As a bond is a long-term commitment, it’s advisable to keep an eye on projections for the interest rate for the next three years, says Coetzee. “This will enable homeowners to pay in a bit more on their bond each month, to reduce the interest over the bond repayment period, or to budget accordingly so that when the interest rates do start to climb, they are still able to keep up with their bond payments.” The next repo rate announcement is scheduled for 20 May, 2021.
Anne-Marie Bamber is Norgarb Properties dedicated Home Loans Consultant. She has over 15 years’ experience in assisting clients with their Home Loan needs and has placed many happy families in their dream homes.
Contact her today for no cost stress-free home-buying.
Home Loans consultant
Tel: +27 (0)21 851 3568 | Fax: +27 (0)21 441 1494 | Cell: +27 (0)82 071 1665