South Africans have been hit from all angles this year, with the latest ‘klap’ being last week’s 0.75% interest rate hike – the second consecutive such increase.
Homeowners and buyers in particular are now panicking about whether they can afford to meet their monthly bond repayments, and stressing about rates continuing to climb.
Some are even worrying about whether the country’s prime lending rate will reach the all-time high of 25.5% in 1998, and scrambling to set up contingency plans in case they do.
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But for these South Africans, the expert advice is simple: chill.
FNB predicts that there will be one more interest rate increase in November of 0.5%, but after that, the situation is expected to stabilise. Of course, one can never 100% accurately predict the future or all of the global events that may impact South Africa’s CPI, but the Bank’s property sector strategist John Loos says it doesn’t appear likely that inflation will go much higher than current levels.
“Only if inflation gets out of hand, can interest rates far higher than the current levels materialise. But to create some kind of ‘hyper-inflation’ would require far more ‘pro-inflation’ fiscal and monetary policies than the current ones in South Africa – Zimbabwe being the most recent example of extreme inflation in the Southern Africa region.”
“In the near term, inflation here in South Africa doesn’t appear likely to get out of hand. Petrol prices have started coming down, and CPI inflation for August, at 7.6%, was already slightly lower than the prior month’s 7.8%.”
Inflation and interest rates
Unpacking some scenarios, he says that, hypothetically, even if the petrol price was to not change at all over the next 12 months, that would ultimately lower year-on-year petrol price inflation to 0%. Even better though, petrol prices have started to come down. CPI is expected to slow again as a result, although food price inflation has not yet turned the corner.
“It looks like we are hitting the peak, or are fairly close to reaching the peak of inflation. And at FNB, we also believe that we are close to the peak of the prime rate. We think that there will be a 0.5% increase in November, but after that, the interest rate will move sideways.”
Loos does reiterate that predicting anything over the next two to five years is risky and that there are “many scenarios” to consider, but ultimately he believes the interest rate will peak at a 10.25% prime rate in 2023.
“That is FNB's main scenario. Inflation appears to already be peaking.”
There are always risks to any forecast, and global politics could be a key one, especially in light of tensions between the “West” and China, and the “West” and Russia – which could lead to supply chain disruptions.
Russia’s Ukraine invasion and resultant boycotts and sanctions caused disruptions of the world’s energy and food markets, and the tensions are far from over. There is also concern from some quarters that ongoing global supply disruptions could see global inflation staying higher for longer, he explains.
“If inflation is elevated for long enough then it risks staying higher for longer as inflation expectations anchor at higher levels, something the world’s central banks want to prevent.”
Generally, he says, it is “tough” to predict what will happen four to five years from now, “after all, we never ever dreamed of Covid in the months before it happened”, but at the moment the near-term outlook for inflation, and therefore the interest rate, looks to be near to stabilising, especially with the petrol price coming down.
Samuel Seeff, chairman of the Seeff Property Group, adds that it is important to put the interest rate into perspective in that it is not higher than what it was before the onset of the Covid-19 pandemic.
“We always knew that the rate would need to go up again, which means that there is no need to panic about the interest rate. In fact, the prime and base home loan rate was 10% in December 2019 and came down to 9.75% in January just before the onset of the pandemic.
“It is important though that given the uncertainty that has crept into the economy and with the resurgence of Eskom’s power outages, that property owners and prospective buyers ensure they are able to cope with the additional costs.”
So should you, or should you not, fix your home loan rate now?
These are Loos’ words of wisdom:
“I never advise anyone to fix their rates or not. That depends on each individual’s appetite for risk. But fixed rates aren’t a tool with which to try and beat the market. You fix your rates to sleep comfortably at night; you fix your rates to have certainty over a portion of your cash flow. And you live with your decision, knowing that you may ‘lose’ some and you may ‘win’ some, depending on where interest rates move to in future.
“The main reason for fixing rates is because the future is uncertain.”
Interestingly, he adds, even if you are inclined to fix your rates, you should probably expect to find less attractive fixed rates on offer in an interest rate hiking cycle. Banks also need to hedge their risks against taking on a client’s floating rate, and they do so in the swap market where ‘forward rates’ and market expectations, to a large extent, determine the fixed rate that a bank can offer.
If the market expects interest rates to increase, as it often does when they are in the process of being hiked, fixed rates offered will often move higher.
“So you get more attractive fixed rates when the interest rates are declining or at least expected to decline.”
Loos' “tip” to buyers and homeowners is this: If you are keen on fixing your rates, the time to look for more attractive fixed rates is often when interest rates are being cut or expected to be cut. Ironically though, this is normally the time when few people are looking to fix their rates, he says.
As with any financial decision, Careen Mckinon and Kay Geldenhuys of ooba Home Loans say there are benefits and risks to fixing your rates. Households on very tight budgets with little potential income growth could benefit in the long term from fixing their home loan rate, they say in a joint statement.
“And, if you are entering into the market for the first time, the fixing of your rate could be a sensible option as it will provide you with protection from rate increases in the future.
The trick to interest rate fixing is taking the long-term view.
“If you believe that that the interest rate will continue to go up, then it’s worth taking the short-term increase for the longer term benefits. Right now we are in an upward interest rate cycle, therefore borrowers should conduct a sensitivity analysis on what interest rate increase they are able to absorb.”
To sum it up, Mckinon and Geldenhuys say: “If it will give you peace of mind to be able to budget your repayments at a fixed rate into the future, then it’s a good time to fix. On the other hand, if you would like to continue to benefit from the current low rate for as long as possible, and believe that the interest rate might come down in the longer term, then it’s best to wait it out, particularly if you are enjoying a very attractive variable rate below the current prime lending rate.”
Carl Coetzee, chief executive of BetterBond, says there is no simple answer when it comes to evaluating the benefits of a fixed or variable interest rate as each buyer’s financial situation and circumstances are unique.
“While it can be reassuring having a fixed rate so that you know what your instalment will be over a fixed period, especially as interest rates rise, it could end up costing you more. A fixed rate is generally higher than a variable rate as it poses a greater risk to the bank.”
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