MAIN IMAGE: JP Viljoen, head of home ownership at Nedbank
South African homeowners and prospective buyers have been navigating a turbulent financial landscape over the past few years. Consumers received some much-needed relief when the South African Reserve Bank (SARB) implemented three consecutive rate cuts of 25 basis points each – with the latest rate cut bringing the repo rate down to 7.5%. However, this easing cycle comes with caution, and homebuyers should still be vigilant in their financial planning.
A welcome respite, but not a game changer
The interest rate reduction brings relief to households that have been stretched thinly by the aggressive monetary tightening cycle. However, over the past 2 years, mortgage repayments have surged as interest rates climbed by a cumulative 475 basis points to a 15-year high. This burden, combined with high inflation and rising debt-servicing costs, has put a strain on affordability, making it more difficult for South Africans to qualify for home loans.
While recent rate cuts have lowered the cost of borrowing, consumers should not assume that the downward trend will continue for an unlimited time. SARB remains cautious, citing external risks such as the US Federal Reserve’s hawkish stance, potential volatility of the rand, and looming electricity tariff hikes. Unlike previous rate-cutting cycles that sparked a quick recovery in home loan activity, this easing phase is likely to be shallower, with further reductions being uncertain.
What this means for homebuyers
For those who plant to enter the property market, affordability is still a key concern. While lower interest rates reduce monthly payments, prospective buyers must take a broad view of their financial position before applying for a home loan. Key considerations include the following:
- Hidden homeownership costs: Many buyers underestimate the true cost of owning a home. Beyond the bond repayment, homeowners must budget for insurance, maintenance and municipal rates and for sectional title properties, as well as for levies. In well-managed estates that offer amenities such as gyms, clubhouses and security services, levies can be high.
- Financial preparedness: With the possibility of interest rate fluctuations in the future, buyers should make sure that they can absorb potential hikes. As a rule of thumb, borrowers should stress-test their affordability at higher interest rates to avoid financial stress down the line.
- Building equity faster: Homeowners who can afford to continue paying their previous, higher instalment – despite the rate cut – should consider doing so. By keeping their repayment levels unchanged, they can reduce the total interest paid over the span of the loan and shorten the repayment term – and ultimately achieve financial freedom sooner.
Looking ahead
While the interest rate cuts provided some relief, recovery of the property market will take time. Buyers and homeowners must take a sensible, long-term approach to managing their home loans. Would-be buyers must make sure that they are financially prepared for the expected and unexpected costs of homeownership. Homeowners, particularly those with some financial flexibility, can use this opportunity to speed up their bond repayments.
As we move into an era of more measured monetary policy, financial literacy and proactive planning are essential tools for any future homebuyers. South Africans must work closely with their financial institutions to make informed decisions that are in line with their long-term homeownership goals.
