Stable Interest Rates Should Make Consumers Smile
This week’s decision by the Monetary Policy Committee (MPC) to keep interest rates stable was the right one and is expected to give flagging business and consumer confidence a lift.
The decision means the repo rate – which is the rate at which the Reserve Bank lends to commercial banks – will remain at 7% for at least another two months, and that the prime rate and variable home loan rate will remain at 10,5%.
The majority of households in SA have high levels of interest-bearing debt and have also been negatively affected by very high food price inflation over the past two years because of the drought, not to mention higher fuel and electricity costs.
This has really limited their ability to pay off debt and achieve more financial stability – and their ability to save and buy their own homes. It has also severely curtailed their disposable incomes, as indicated by very subdued retail sales over the festive season, and the current low rate of credit extension growth.
Of course all of this, he says, works against the economic growth and investment that SA so desperately needs in order to reduce the unemployment rate, which currently stands at 27% - the highest it has been since the end of 2010.
In fact, it has even been suggested that the MPC should start cutting rates soon to stimulate the economy and job creation, but for now, the drought has broken and food price inflation is set to moderate, consumers will not have to pay higher instalments on their debts and overall inflation is expected to start trending downwards as a result of the relative strength of the rand against the dollar and other major currencies.
So unless there are any major international financial disasters, the status quo decision on interest rates is an indicator that 2017 is going to be a better year for most households than 2016 was.
And certainly, the MPC decision is good news for current homeowners and prospective homebuyers.
It means that the monthly repayment on a home loan of R1m obtained at an interest rate of 10,5% will remain at just under R9900 – and give borrowers the opportunity to use any spare cash they may have now to pay off some debt.
As for those planning to buy a new home this year, now would be a great time to increase their savings so that they can put down a bigger deposit. This will not only make their monthly home loan instalments more affordable, but assist them to qualify for a home loan in the first place.
This is especially important at the moment, he says, because the banks are applying strict credit qualification criteria and looking very closely at debt-to-income ratios before approving loan applications.
In addition, potential buyers should be sure to apply for their home loans through a reputable mortgage originator like Acutts Mortgage Division, which is prepared to motivate and caretake individual applications, and can advise them as to the most suitable home loan options for their individual financial circumstances.
The advantage in following this course is evident from the fact that we are currently able to obtain approval for more than 70% of the home loan applications we submit, as opposed to a success rate of less than 35% in the open market.”
Author: Riana Havenga