If there is ever a time when the saying, 'It never rains, but it pours' applies, it has to be now. We are being hit from all sides – loadshedding, high inflation, exorbitant fuel prices, almost monthly increases in grocery prices, and the ongoing rise in interest rates.

For ordinary South Africans with a home loan, an interest rate increase normally signals financial difficulty. But before we allow our anxiety levels to stress us out and keep us up at night, let’s start by understanding interest rates and how they affect us directly.

What is the repo rate?

The repo rate (currently 7.25%*) is the rate at which banks borrow money from the South African Reserve Bank (SARB). The repo rate is important because banks and other financial institutions use it to determine how much interest to charge when you borrow money from them. This is called the prime lending rate. Both the repo rate and the prime lending rate aren’t fixed, and can go up or down.

Why is the prime lending rate important?

The prime lending rate, currently 10.75%*, determines the interest rate banks will charge on credit such as car, home and personal loans, as well as credit cards. Your bank will look at your risk profile, credit score and income to determine how much interest to charge you – for example, prime +2%. When the prime lending rate increases or decreases, so will the amount you have to repay each month.

Banks also offer variable and fixed interest rate structures. With variable interest, the rate will fluctuate over time. With a fixed interest rate, the parties agree to keep the rate at, say, 10.75% a year. That means that you will always pay 10.75% interest, regardless of changes in the prime lending rate.

People tend to consider a fixed rate when rates are already high, and they are afraid that they will go up even more. The truth is that the best time to fix yours is not when interest rates are high, but when they are low – so that you win when they go up.

Before you decide on a fixed rate, first find out what your bank is willing to offer you and what your repayment period will be, so that you can work out what the financial implications would be.

Implications of a rate hike

Ayanda, a 30-year-old career woman, is taking a very disciplined approach to managing her finances. She budgets regularly, and checks and maintains her credit score.

Ayanda took out a bond of R850 000 to finance her first home at prime (7.5%) plus 1% (variable interest rate) in January 2022. She is concerned about the rising interest rates, and worries about whether she will still be able to pay her monthly instalment timeously in this difficult economy. The breakdown below shows her initial loan agreement and monthly instalment.

Ayanda’s original mortgage calculation

• Loan amount – R850 000
• Loan term – 240 months
• Interest rate (prime +1%) – 8.5%
• Monthly instalment ­– R7 377

Calculations kept simple for illustration purposes

In July 2022, the prime lending rate increased to 9%, which amounted to an increase of 0.75% from the previous rate. This resulted in Ayanda paying 10% interest on her loan (prime +1%) and a higher monthly instalment – and that was not the last increase for 2022.

Ayanda’s new mortgage calculation

• Loan amount – R850 000
• Loan term – 240 months
• Interest rate (prime +1%) – 10%
• Monthly instalment ­– R8 203

Calculations kept simple for illustration purposes

Looking at the calculations in the above, Ayanda’s monthly home-loan repayments increased by an estimated R826, putting increasing strain on her finances.

How can she weather the storm?

There are two things Ayanda can do to ease the stress of what lies ahead. Firstly, she should start with a review of her monthly budget and determine how the additional R826 on the bond repayment, including an increase on other loan repayments such as her car repayment and store accounts, will affect her.

This review will help her to identify where she may have to plan ahead, and cut any luxuries, so that she doesn’t default.

Secondly, should Ayanda fall behind on her payments, it’s advisable that she immediately notifies her bank.

Many people bury their heads in the sand at this point, hoping the problem will go away. If you are in this situation, it is best to rather approach your bank to discuss payment arrangements or how your bond can be restructured – because the interest on outstanding loan amounts can compound quickly when you default.

Insider Insight

Lizl Budhram, Head of Advice for Old Mutual Personal Finance, talks about interest rates and buying property.

Is it wise to fix your bond rate?

‘It’s a good idea to fix it when the rate is low, before it goes up. The problem is that even economic specialists can't predict when it'll go up, by how much and how long it will stay high. The decision to fix your rate should depend on how stable you need your bond repayments to remain.’

Should you be swayed when you hear: ‘It's a buyer’s market’?

‘This comment, indicating that it's a good time to buy property, has limited applicability to property types or areas. If it comes from an estate agent, it may serve their agenda rather than offering a well researched fact.'

The percentage of people saving to buy property is down. Is this a trend among your clients?

‘People are making budget cuts, which illustrates that they appreciate the importance of living within their means. When pausing a savings goal, it’s valuable to get professional advice to make sure you kick-start it, once again, when your budget constraints lift.’

*All information correct at the time of publication.

Need to speak to a financial adviser?

To find one in your area, call Old Mutual on 0860 60 60 60 or visit our website.