Recent inflation figures have raised fears that we might possibly see a further rate hike in December. With the prime lending rate at 14% compared with 10,5% 18 months ago, borrowers are starting to feel the pinch, while savers are feeling cash flush.
Here are some financial strategies to consider:
Borrowers
Many South Africans increased their debt exposure in the past few years and consequently are feeling the pinch. On a mortgage bond of R500 000, borrowers are paying nearly R1 500 more a month, which means one would have to be earning an additional R2 000 before tax. A further rate hike in December will add R200 to your bond repayment.
Shop around
The first step is not to panic and lock yourself into a fixed interest rate at this point. It might have been a great decision in hindsight, but we are close to the top of the interest rate cycle and this could count against you when rates start falling. You should rather shop around for better interest rates.
A 50 basis point (0,5%) reduction will shield you from a possible rate hike in December. There is increasing competition in the market and if the value of your home has increased significantly or your salary is higher than when you first applied for your home loan, you might be able to negotiate a better deal. Shop around and use the leverage to negotiate with your bank. If it won’t budge then consider switching. Yet you need to factor in the costs of switching the registration of the loan to make sure you are in a better position overall. Some banks are even prepared to waive those costs to get your business.
Consolidate debt
If you owe less on your house than what it is worth, you can increase your bond and settle expensive short-term debt, such as your credit card and car payments.
But, this comes with a serious warning sign. The idea is to benefit from the lower interest rate provided by your home loan, not to spread your payments over 20 years. For example, on a car loan of R100 000 at 1% above prime (15%), your repayments will be about R2 350. In five years that would cost you R140 980. If you took R100 000 from your bond (at 12,5%) to settle the loan and still paid off the R100 000 in five years, you would reduce your payments to R2 230, saving yourself more than R100 a month, but the cost of the total loan would be R133 600, which is a saving of more than R7 000. If you paid the R100 000 off over 20 years, your monthly repayments would fall to R1 124, but would cost you R269 860 in total. Rather cut back on your expenses and benefit from the lower interest rate rather than a longer repayment period.
Extend your loan
If you are in serious financial difficulty and at risk of losing your home, then you can consider adjusting your repayments. New mortgage lender Integer is offering an interest-only option for the first two years. This means that you will pay only the interest on your bond and not the capital. This will provide some breathing space if you are under financial stress.
Just remember that this will increase your monthly payments after the two years as the term of the loan is still the same. You could ask your bank to extend the period of your home loan, but again treat this with extreme caution. A R500 000 bond over 20 years at 12,5% will have a monthly repayment of around R5 622. By extending the bond to 30 years, you reduce your instalment to R5 281. You will, however, pay a massive R550 000 in additional interest. If you do need to take this life-line, make sure you readjust as soon as you are in a better financial situation or once interest rates have come down.
Potential borrowers
Try avoiding debt, period. But if you are looking to buy a home, now is not such a bad time. House prices are under a bit of pressure from higher interest rates and you could negotiate a better deal. You also know that you are buying near the top of the interest rate cycle so you know you can really afford the house.
But, don’t max out your repayments and keep some flexibility in case we do see another rate hike. Once rates start to fall, maintain your bond repayments. You will cut years off your mortgage repayments and save hundreds of thousands of rands. You will also never have to worry about future interest rate hikes.
Savers
You are sitting in the pound seats now after having experienced very low interest from your money market funds in the past few years. Now could be a good time to consider fixed deposits and lock in some of these high rates. Tony Barrett, head of wealth management at BJM Private Client Services, recommends investing in a managed cash fund with one of the asset management houses instead.
These are referred to as cash-plus funds or high-income funds and focus on outperforming money market rates. Barrett says the fund manager will lock in the interest rates for investors, but you still have the flexibility to access your money whenever you need.