With the repo rate climbing 50 basis points in the last half of 2015, the upward trend in the prime lending rate looks set to continue.
The latest ABSA Housing Review predicts mortgage interest rates to hit 10.25% by the end of 2016. Add to this consumer price inflation (forecast to increase from an average of 4.6% to 5.7% in 2016) and low economic growth thanks to a struggling global economy, it looks set to be a pretty tough year for property owners and buyers alike.
"Things aren't as dire as they were after the global financial crisis back in 2007/2008," says Tony Clarke, managing director of the Rawson Property Group, "but finance affordability is definitely being affected by the economy, and it's going to be a difficult year for a lot of property owners faced with increasing mortgage repayments. New buyers are also going to be thinking twice before committing to purchases."
In light of the increasing financial strain, Clarke advises existing home owners to focus on reducing unnecessary spending and make their bond repayments their financial priority. "With interest rates climbing, it becomes even more important to put every possible penny into your bond. Not doing so means paying dramatically more money to the bank over the long-term, increasing the cost - and therefore decreasing the return - on what is likely one of your biggest investments."
Clarke also recommends existing property owners and prospective buyers both avoid using credit cards and store accounts to rack up more expenses. "The market has been flooded with credit opportunities and South Africans are already struggling with debt. Credit accounts are yet another expense for already stressed mortgage holders, and for prospective buyers they can mean the difference between getting a bond and not."
Bond requirements will likely be more stringent in the foreseeable future, as banks need to ensure new mortgage-holders will be able to service their debt in spite of increasing costs. "Home buyers need to make sure they have an excellent credit record, and should be conservative when applying for a new bond, not only to increase their likelihood of success, but also to reduce future financial strain," he says. "Over-extending at present would be very ill-advised."
For those who already find themselves nearing the limit of their financial capabilities, but have a mortgage that will almost certainly increase in the new year, Clarke suggests investigating the option of fixing your interest rate with your bank for the next two years. "Fixed rates are typically higher than linked rates at the outset, but they allow bond-holders to be able to accurately budget for the full fixed period. There is also the chance that the interest rates will climb beyond the fixed rate that you have negotiated, which could save you money at the end of the day."
Other options to ease the strain include using your property to earn income. "Taking in a house-mate or lodger can be a great way to bring in some extra cash, and businesses like Airbnb make it very easy to host short-term guests as well."
Existing buy-to-let investors who are struggling to cover their costs with rental income, however, may be forced to consider selling some of their units. "Landlords might not to be able to increase rentals in line with their own costs, which could force them to liquidate some assets and use that money to reduce their monthly repayments."
While the number of distressed sales will most likely increase as result of the economic climate, home-owners will be relieved to know that a general decline in property prices is not predicted for 2016. "Prices have been stabilising in 2015 after a period of excellent growth in the preceding years . That trend looks set to continue in the upcoming year," Clarke says.
Article by: Rawson Property Group
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