South African homeowners to get extra money in their pocket

South African homeowners are set to receive a R4 billion boost in disposable income as their mortgage repayments fall after a Reserve Bank interest rate cut. 

This will also significantly boost the South African economy, with consumer spending set to recover. 

Homeowners have come under immense pressure in recent years as the Reserve Bank hiked interest rates to 15-year highs. 

The Prudential Authority revealed last month that defaults on residential mortgages growing by 36% year-on-year to the end of February. 

“Persistently high inflation and high interest rates have contributed to a significant rise in consumer strain, with increases in early arrears, debt counselling inflows, and unsecured credit demand,” the regulator said. 

Given this pressure, most retail banking products, from personal loans to revolving credit facilities to residential mortgages, exhibited significant strain. 

The performance of residential mortgages has been especially impacted by the rise in interest rates since November 2021.

Total defaults on this type of loan rose 36% year-on-year to the end of February, driven by first-time buyers. 

There was a significant uptick in demand for homes from first-time buyers in 2020 and 2021 due to the lower cost of borrowing, thanks to the Reserve Bank cutting interest rates to support the economy during COVID-19. 

Since the hiking cycle began in November 2021, the repayments on a R1.5 million home have risen by R4,600 per month. 

The regulator said banks have reacted by working with customers to restructure their loans and are implementing risk containment measures.

Relief is on the way

The financial pressure on South African consumers will be alleviated in the coming months, with economists predicting interest rates will be cut in September.

Standard Bank chief economist Goolam Ballim expects the Reserve Bank to cut interest rates by 25 basis points at its next meeting, with a cumulative 100 basis points of cuts over the next year. 

This will result in the repo rate declining to 7.25% and the prime lending rate to 10.75% as inflation continues to moderate towards the Reserve Bank’s range of 3% to 6%. 

Standard Bank calculated that a 25 basis point cut would reduce the repayments by R208 per month or R2,500 per year for a home loan worth R1 million. 

Overall, after a 100 basis points reduction in interest rates, homeowners will pay R832 less per month on their mortgages. 

South Africa’s home loan market is estimated to be worth around R1.2 trillion. This means a 50 basis point cut will free up R4 billion currently going towards repayments. 

An entire percentage point cut, as forecasted by Standard Bank, will save homeowners around R8 billion in repayments. 

This will significantly impact the disposable income of South African consumers, enabling them to spend more and boosting economic activity.

A 100 basis point reduction within the next year is unlikely to significantly ease the financial burdens faced by South African households.

Since November 2021, the Reserve Bank has increased interest rates by a total of 475 basis points.

Consequently, even with the projected 100 basis point decrease over the coming year, interest rates will still be much higher than they were before the pandemic.

Ballim anticipates minimal long-term relief for South Africans, having forecasted earlier this year that the repo rate will remain at 7% until 2027, with the prime lending rate staying above 10%.

Interest rates are expected to remain high for an extended period due to persistent inflation. Standard Bank predicts that inflation will slightly decrease to an average of 5% over the next 12 months.

This figure is still close to the upper end of the Reserve Bank’s 3% to 6% target range, suggesting that the rate-cutting cycle will be brief and modest.