Applause for rate cut, advice for buyers

The one percentage point drop in the Reserve Bank’s key repo rate is decisive and very welcome in the light of the struggle that lies ahead for SA’s property market this year, says Tony Clarke, MD of the Rawson Property Group.

The Monetary Policy Committee decision announced on Thursday 19 March will see the repo rate drop from 6,25% to 5,25% and the prime rate from 9,75% to 8,75% – its lowest level in years.

For existing homeowners with bonds, this will mean a reduction in their monthly instalments of R65 per R100 000 outstanding – or R650 per month on a R1m bond.

“This is a significant amount,” he says, “and we would urge those who can afford to do so to keep paying their current monthly instalment as long as they can, to reduce the capital amount owing on their bond, pay their homes off faster and save on interest.”

By paying an additional R650 a month off a R1m bond, a homeowner could cut the usual 20-year bond repayment period by more than three years and stand to save some R209 000 in interest.

For homebuyers, this week’s rate cut will make it easier to qualify for home loans, since it will also reduce the instalments they have to pay on any other kind of debt, from car instalments and school fees to credit and store card balances, and they should thus have more disposable income available to cover a monthly bond repayment.

However, says Clarke, buyers should be cautious about taking the rate cut as a signal to obtain a bigger home loan than they were previously contemplating. “This cut and the additional ones expected later this year will bring rates close to historic lows, which means they can be expected to rise as soon as the economy improves.

“So our advice now would definitely be not to buy a bigger home or take out a bigger loan, but to give yourself plenty of leeway to afford an increased monthly instalment should rates start to rise. In the meanwhile, if you do have any extra cash available because your other monthly repayments have gone down, use it wisely to pay off as much debt as you can.”

Looking ahead, he says a one percentage point increase will probably not be enough to take the SA economy out of recession, or to stave off a decline in the property market.

“But combined with the tax cuts announced earlier this year and the large drop in the petrol price expected in early April, it will do a great deal to keep inflation at reasonable levels despite the drop in the Rand exchange rate. That will help many families to keep their heads above water while we wait to see what the final effects of the Covid-19 pandemic will be on the global economy and our own. It will also boost consumer confidence, which is a key factor in maintaining positive momentum in the real estate market.”

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