Rate cut may not be enough to save your house

The Reserve Bank announced a much-anticipated interest rate cut of 25 percentage points this week, taking the prime lending rate to 11%, but this may not be enough to help homeowners who are currently struggling to pay their monthly bond instalments.

That's the word from Berry Everitt, CEO of the Chas Everitt International group, who notes that according to the latest FNB Property Barometer, 23% of all current home sales in SA are being made due to financial pressure, which indicates that a large number of households are still feeling the effects of the rapid post-Covid rise in both inflation and interest rates. Indeed, the latest available figures from the Prudential Authority, which regulates SA's banking sector, estimate that 6% of homeowners are already in arrears with their home loan repayments.

"And unfortunately, today's rate cut may not do all that much to ease the pressure. For those with a R1m bond, it will reduce the minimum monthly bond payment from around R10 500 to around R10 300. It will also, of course, mean lower instalments on other types of debt such as car finance, credit and store card debt and personal loans.

"In addition, the headline inflation rate in December was just 3%, due to the lowest food price inflation in five years, and lower fuel prices at the end of last year, which is also good news for consumers."

However, he says, fuel prices are expected to rise again next month, and there are steep electricity price hikes in the pipeline, that coming on top of the other cost increases that consumers often face at this time of year (such as higher school fees and insurance premiums, could easily cancel out any relief brought by this rate decrease, as well as the two 25 percentage point decreases announced last year.

"Altogether, these three rate cuts have reduced the monthly repayment on a R1m bond by a total of just R520, and the Reserve Bank is already warning that uncertain global trade conditions could result in inflation starting to climb again faster than anticipated due to a decline in the rand/dollar exchange rate.

"What is more, we would be surprised if there are any more rate cuts in the near future, due to the US Federal reserve having announced a hold on rate cuts earlier this week."

As a result, Everitt says, homeowners who have been feeling the pinch should look well beyond any short-term relief brought by this week's cut, and try to work out whether they will be able to cope when or if the cost of living starts to rise again, or when the local authorities introduce their annual utility cost increases - usually around July - or if the Finance Minister decides to raise VAT or income taxes in the Budget.

"And if they foresee that they will probably find themselves back in a tight spot, the time to do something about it is now, for two reasons. The first is that the demand for residential property is definitely on the rise again, right across SA, and that values are sure to follow. This will make it more expensive for those who plan to cut costs by downscaling or downsizing to buy their next home. They will need a bigger home loan than they might require if they move now - and more income to qualify for that loan.

"The second reason is that if you wait until you are in real financial distress, and start to default on your bond repayments, you will be putting yourself in a very precarious position. Not only will you be risk of having your home repossessed and sold off by the Sheriff, but also at risk of damaging your credit record so badly that you will have difficulty renting somewhere new to live and may not be able to buy another home for many years."

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Rate cut may not be enough to save your house