Trouble for many South Africans with a home loan

Residential mortgage defaults have risen strongly over the past two years, while elevated interest rates have ensured that just below 10% of all household disposable income is spent on servicing debt. 

The Reserve Bank revealed this in its latest Financial Stability Review, which outlines the most significant threats to the financial system. 

One of the constant, underlying risks to the overall system is the increased financial pressure that households and small businesses feel. 

The Reserve Bank said the pressure households feel has only really come through in the past two years, with savings increasing greatly during the Covid-19 pandemic. 

As the pandemic-related restrictions eased and the economy opened up, corporations and households had some savings to fall back on to help finance their consumption. These savings buffers also shielded them from the initial effects of rising interest rates.

However, since the onset of interest rate hikes in November 2021, households began to show signs of stress. 

As interest rates rose by 475 basis points, by mid-2022, borrowers began encountering difficulties in meeting their loan obligations. 

The Reserve Bank said non-performing loans (NPLs), an indicator of credit risk, are recognised as one of the primary factors that historically contributed to bank failures and subsequent banking crises. 

The value of these kinds of loans rose significantly from March 2023 to July 2024, from R257 billion to R304 billion, with the NPL ratio increasing from 4.7% to 5.7%. 

This is indicative of the broader financial pressure on South African households as repayments on homes and cars became increasingly unaffordable. 

The ratio of households’ debt-service cost to disposable income seems to have peaked at 9.2% in the first quarter of 2024, declining slightly to 9% in the second quarter.

The growth in household debt also slowed over the same period, which may mitigate against growing debt-servicing costs going forward.

Financial distress among households is also evident in data collected by the National Credit Regulator (NCR). 

There were close to 28 million credit-active consumers in the first quarter of 2024, of which just over 10 million had impaired records. 

Despite the declining trend since the end of 2019, impaired records as a percentage of total active consumers remained high at about 36% in the first quarter of 2024.

Homeowners have borne the brunt of high interest rates, with their monthly repayment skyrocketing as a result of the Reserve Bank’s efforts to tame inflation. 

Since November 2021, interest rates have risen 475 basis points to a 15-year high, greatly increasing the cost of financing a home. 

For example, the repayments on a R1.5 million house had risen by R4,600 per month before the Reserve Bank entered its cutting cycle in September 2024. 

Another trend that has been flagged is that many homeowners bought houses they could not afford at low interest rates during the pandemic when the Reserve Bank cut rates to stimulate the economy. 

This has resulted in the defaults on residential mortgages growing sharply over the past two years, as measured by the percentage of homeowners unable to make a monthly repayment within the past 90 days. 

Data from the Prudential Authority, a division of the Reserve Bank and the country’s banking regulator, shows that residential mortgage defaults have risen to above 6% of all home loans – nearly double its historical average. 

The data also showed that defaults on home loans have risen 36% year-on-year so far in 2024. 

Old Mutual’s Savings and Investments Monitor revealed further signs of strain on homeowners. 

The monitor reveals how working South Africans, from young adults starting their careers to those planning for retirement, are faring financially. 

It showed a noticeable uptick in the proportion of South Africans approaching lenders for financial relief. 

Many have requested to make other payment arrangements, while others have taken out a loan to consolidate their debt. 

These increases are largely due to first-time home buyers being caught out by the sharp rise in interest rates following a period of unusually low borrowing costs. 

Rising defaults on residential mortgages are just one aspect of the financial challenges facing South African households, who increasingly resort to other forms of debt to sustain their lifestyles amid the escalating cost of living.

Many individuals also opt to skip insurance payments and halt their retirement fund contributions to manage their expenses.

The Prudential Authority has observed that more consumers are relying on credit cards and personal loans to cover essential needs like food and housing.

The rise in defaults on residential mortgages is shown in the graph below.