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With the Russia – Ukraine conflict in full swing, the economic growth prospects of a world reeling from the effects of the Covid-19 pandemic look bleak. A decline in the energy and food production sectors will certainly result in the disruption of global trade, while pushing inflation higher. The aforementioned were the sentiments of Mr Lesetja Kganyango, the Governor of the South African Reserve Bank (SARB).
Health experts predict that South Africa may enter a fifth wave around May 2022, it does seem that the Covid-19 pandemic will be in our midst for a long time. In the past two years businesses have had to adopt alternative methods and measures to contain and survive the effects of the pandemic, so that they can return to trading on a sound footing. However, for those businesses whose operations were severely affected and left with no choice but to close shop, it means tens/hundreds/thousands of jobs were lost. Many households had to put up with adjusting their monthly spending and living standards in consequence.
The Monetary Policy Committee (MPC) recently revised the Repo Rate by twenty-five (25) basis points, to 4.25 percent. Repo rate is the rate of interest at which banks borrow money from the Reserve Bank, whilst the Prime Lending Rate is the rate of interest at which banks lend credit to consumers. The relationship between the Repo Rate and the Prime Lending Rate is one of direct proportion, as a rise in the Repo Rate will result in a higher Prime Lending Rate. For consumers of credit and home buyers, this calls for reflection and careful consideration seeing that it will have a direct bearing towards affording bond repayments. A higher Repo Rate results in a higher Prime Lending Rate, which also means the cost of repaying towards a bond will increase as a result.
Fluctuations in interest rates are occasioned by market conditions and the economic outlook prevailing at the time. In order to remain in certainty, some home buyers prefer to have a fixed interest rate as opposed to a variable rate that is affected by market fluctuations. A fixed interest rate means that during times of economic boom or decline, it will remain the same and unaffected. Consequently, fixed rates are usually higher in order to cover the lender’s risk. In practice rates are usually fixed for up to five years, whereafter a new arrangement can be negotiated or the credit facility reverts to a variable interest rate. In the event that one wishes to have a fixed rate of interest, it can be effected after the bond has been registered. The decision on whether to have a variable or fixed interest rate is dependent on individual circumstances. It is definitely helpful to make such a decision after benefitting from a reliable economic forecast. It does appear that a credit facility (e.g. bond) where a variable rate of interest is applicable, is often cheaper as compared to where a fixed rate applies.
At the end of the day, a consumer’s credit profile also plays a huge role in how much one will pay towards bond repayments. Using the Prime Lending Rate as a benchmark, lenders will set the interest rate either above or below the Prime Lending Rate. Credit consumers are therefore encouraged to maintain a good credit profile as it will work in their favour when applying for credit i.e. better terms.
In conclusion, analysts in the property sector predict further rises in the Repo Rate in 2022 right into 2024 as crippled economic growth runs its course. That information is critical when one is deciding on whether to keep the interest rate applicable on their home loan fixed or variable, awake to the fact that it will eventually affect the cost towards bond repayments.
We specialise in bond origination and bridging finance. We assist home buyers to find mortgage bonds that have favourable terms, thereby saving you time and saving you money.
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