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Interest Rate Hike

How will the Interest Rate Hike affect your Home Loan?

Ever since June 2006, it has been with a fair measure of trepidation that South African homeowners wait for the outcome of our quarterly MPC (Monetary Policy Committee) meetings. The reason? Our repo rate.

It took the South African Reserve Bank a mere 18 months to propel interest rates from a comfortable 700 basis points to a tight fitting 1100 basis points. The simple fact that the increases were very necessary from an economic perspective, does little to ease the financial pinch many homeowners are feeling right now.

Speculation is rife, with the most morbid of speculators predicting the worst – rarely failing to point out to the rest of us that once upon a time, ten years ago, interest rates were courting levels of 25%. This is enough to send any sane person running for the hills – or to the bank to secure fixed rates on their home loans.

Fortunately there is no need to take rash actions such as these. The chances of the 1998 situation repeating itself are less than slim. It is, in fact, more likely that the repo rate will settle after 2008 – albeit that we may be faced with another hike or two during the course of the year – and that we could start seeing decreases from the middle of 2009 onwards. In the mean time, it would be good to establish exactly how interest rate hikes will affect your home loan and how to best address the consequences.

Learn how to use a mortgage calculator

A mortgage calculator (like those you can find at http://www.bankrate.com/brm/calculators/mortgages.asp) will help you to determine exactly how your home loan will be impacted should the MPC decide to further increase the repo rate. The internet abounds with free mortgage calculators that make the otherwise complicated formulas as simple as filling in a couple of fields and clicking a couple of buttons.

Understand your financial resilience level

To gain an understanding of your financial resilience level in respect of home loan repayments, you will first need to compile a realistic household budget. Of essence is that you differentiate between essential expenses and optional expenses. Based on this, you should have a fairly clear indication of how much extra you can afford to pay on your home loan.

Next, you can use the mortgage calculator to calculate the effect of interest rate increases on your home loan, by increasing the interest rate variable in increments of 0.25%. Make a note of the maximum interest rate level you can cope with.

Be pro-active in addressing the consequences

Fixing your home loan interest rate, should be your last resort. There are many other things you can and should first try, before fixing. These are, in brief:

Secure a better interest rate: Approach a mortgage originator to source quotes from both your bank as well as the other financial institutions. Now is the time to be mercenary. If you can get a better rate than the one offered by your bank, and the costs of switching makes sense, seriously consider moving to another financial institution. For every 0.5% in rate concessions, you increase your resilience level by 0.5% in return.

Consider a longer home loan term: If the rate concession is not sufficient to mitigate your repayment risks, you can ask the mortgage originator to source quotations for a 30 year instead of a 20 year home loan. On a R 500,000 loan, it could mean a monthly reduction of around R 280.00.

To conclude

If all else fails, you can fix your interest rate. Although this means that you will pay more when the interest rate tide turns, paying a little more then, is probably preferable to sacrificing your family home right now.

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