When will interest rates increase and by how much?

Introduction

The interest rate is a common term that individuals hear because there are often comments about it increasing or decreasing. It has been said that South Africa is expecting another interest rate hike in November this year and in the new year.  

What are interest rates?

Interest rates are percentages on loaned amounts that a lender will charge its borrowers. Or in other words, it is a percentage that acts as a baseline for lending money.

Why do we need interest rates? The different types and who lends it?

Interest rates are controlled by the South African Reserve Bank, otherwise known as SARB. SARB makes use of a monetary policy, which is needed to calculate how much money a countries economy should have, like South Africa.

The committee of the monetary policy sets the Repo Rate, and this is the rate at which the banks borrow money from SARB. The Repo Rate is adjusted to keep inflation below a target that has been set. Currently, the Repo Rate is sitting at 6.25%.

The Repo Rate is directly linked to the Prime Lending Rate. This is an additional percentage (currently 3.5%) on top of the Repo Rate, and it is what consumers (buyers) are charged by the banks, in order for the banks to make a profit. Currently, the Prime Lending Rate is sitting at 9.75%. A bank would directly link their lending rate to the Prime Lending Rate. As an example, you would pay Prime + 0.5%, or Prime - 0.2%, on your Home Loan. This rate will vary from bank to bank, and individual to individual, based on many factors, amongst others your loan amount, the property you purchase, your credit score and affordability. When the Repo Rate changes, the Prime Lending Rate automatically changes, and that is in effect a change in interest rates.

What does this mean for the property market?

When interest rates increase, homeowners will pay more on their loaned amount from the bank and there is less of a chance of prospective purchasers buying homes with loans from the banks (bonds). In contrast, when the interest rates decline, bonds become more affordable to pay off and the idea of buying a home, is more appealing.

Interest Rate Fluctuations

The next interest rate hike for 2022, economists are predicting a spike of 50 bps (0.5%), which may happen on the 24 November 2022,  at the next MPC meeting. BPS stands for "Basis Points" and this is used to measure percentages because it is less ambiguous and more precise than using a percentage.

The Monetary Policy Committee (MPC) comes together six times a year to discuss the Repo Rate. At the moment, additional interest rate rises are anticipated before the end of the year and potentially even in 2023, with a rough estimate of 6.5% to 7.5% as the Repo Rate. This means that the Prime Lending Rate could go up to between 9.75 and 10.75% by 2023.

The current inflation rate for South Africa is 7.6%. Economists predict that inflation will stabilize during 2023 and begin to decrease again in 2024 to meet the objective of 4.5% inflation that SARB is striving for, depending on how much oil and electricity cost.

Conclusion

As a seller or purchaser, 3%.Com Properties wants you to get the most out of your dream home or property during this time, that is why we thought it would be best to share some insight about interest rates, how they work and their fluctuations.

It is always a good idea to do a proper affordability calculation before purchasing a home and leaving a bit of extra space in your budget, in case the interest rate increases.

We can also assist you with what you can afford by contacting us or using our affordability calculator.

Visit our website to find out more!