/ 9 September 2010

How the interest rate cut will affect you

As anticipated, Reserve Bank Governor Gill Marcus cut the interest rate by 50 basis points on Thursday, bringing the prime rate down from 10% to 9,5%.

The mortgage rate is at its lowest level since mid-1974, which means that households can now recover financially and property will be more affordable.

Although some industry players feel the rate cut came too slowly, or the South African Reserve Bank (SARB) should have cut by a full percentage point to really make a difference to the property market’s performance, the cut was on the whole well received.

In fact, FNB Home Loans strategist John Loos said the cautious approach of the SARB would be a blessing in disguise as it will encourage improvement in terms of household sector indebtedness.

“The rate cut will benefit the affordability of housing against the background of property prices rising by more than 10%, year on year, in the first eight months of the year,” said Luthando Vutula, managing executive of Absa Home Loans. Vutula also said that mortgage repayments would now be as much as 31% lower than in late 2008, when the mortgage rate was at a level of 15,5%.

“Back then, the monthly repayment on, for example, a mortgage loan of R500 000 over a 20-year term, was R6 769. After today’s rate cut, the repayment on such a loan amount will amount to R4 661 per month, which translates into a cumulative saving of no less than R2 108 since late 2008 before rates entered the downward cycle,” said Vutula.

This week’s rate cut will reduce a R500 000 mortgage by R220 a month.

It is expected that interest rates will not change for the rest of the year and much of 2011 — Absa expects the first rate hike only in the first quarter of 2012.

Savings on your passenger vehicle
According to Sydney Soundy, managing executive of Absa Vehicle and Asset Finance, the rate cut will assist in off-setting the effect of the carbon emissions tax on passenger vehicles when it comes to new passenger vehicle pricing. The increase in prices of vehicles resulting from the emissions tax is expected to average between 2% and 3%.

In terms of monthly repayments, the latest interest rate cut means that a customer paying off a vehicle loan of R100 000 over 60 months can expect to pay R300 less in premiums per annum. This equates to a saving of R25 per month.

On a R200 000 vehicle loan over 60 months, customers will save about R600 per annum and about R50 per month.

Customers currently paying off a R300 000 car loan over 60 months can look forward to savings of up to R900 per annum and R75 per month.

Since interest rates have decreased by 6% since December 2008 (including today’s cut) customers managing a R150 000 vehicle loan and a R500 000 mortage loan would have realised a monthly saving of R471 and R2&nbsp108 respectively thus far. The collective household annual saving is a not insignificant R30 948.

Under these circumstances, Soundy suggests, customers who cut back on or cancelled their motor vehicle insurance should re-think this and reinsure their assets.

He also recommends that surplus money be used to pay off debts and be invested and saved for the future.

Red flag
This leads us to a red flag for consumers.

Household indebtedness is still at 78,4% and although it is down from around 83% at the beginning of 2008 it is still much too high for comfort.

Household credit growth has been accelerating mildly and borrowing will still be restricted until the household debt-to-disposable income ratio declines to a healthier level. It may be that the current rate cut can achieve this, though.

Loos anticipates that household credit growth will slow in the near term as new mortgage lending (a key driver of overall household sector credit growth) starts an expected decline in the 2nd half of 2010, in a slower economic growth environment.

Growth should remain at muted levels and nominal household disposal income should grow at a faster rate than credit growth, bringing about a lower and more household debt-to-disposable income ratio.

A good time to buy property
A combination of factors signals that this is a relatively good period for home buyers. Potential buyers should, however, be aware that this does not mean that there are no housing-related cost increases.

Municipal rates and utilities tariffs are set to be a key source of housing-related cost increase in the next few years, as utilities look to find the funding for much needed infrastructure.

“What the SARB is currently giving, other authorities are taking back,” Loos cautions. “One should buy a home well within one’s means and make provision for the big housing-related cost increases and rising transport costs.

Unless you telecommute, living close to work seems a sensible idea right about now.

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