South African homeowners in deep trouble

South African households are under immense financial pressure, and cracks are beginning to show. Defaults on home loans rose 36% year-on-year, and nearly a third approached lenders to make other arrangements to pay off their debt. 

Old Mutual released its annual Savings and Investment Monitor earlier this week, revealing that despite some improvements, South Africans are facing severe financial headwinds. 

In a presentation to the media, the insurer’s chief economist said relief is on the way in the form of interest rate cuts and improved economic growth. 

However, this relief will not come overnight. The effects will only be felt in a year. 

The most significant headwind facing South African homeowners is the increased debt-servicing costs that have followed a sharp uptick in interest rates. 

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 have risen by R4,600 per month since rate cuts began. 

The Reserve Bank has been hesitant to cut rates as inflation has remained sticky at the upper end of its target range of 3% to 6%. 

This has pushed it to keep rates at a 15-year high for over a year, keeping the pressure on homeowners, and cracks are starting to show. 

“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 Prudential Authority said. 

Under these challenging conditions, various retail banking products, such as personal loans, revolving credit lines, and residential mortgages, experienced considerable stress.

The annual report highlights that the performance of residential mortgages has been notably affected by the interest rate hikes starting in November 2021.

Defaults on residential mortgages surged by 36% year-on-year by the end of February.

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. 

In 2020, the Reserve Bank cut interest rates to support economic activity during the Covid pandemic, reducing the cost of servicing debt. 

However, when interest rates rose in response to elevated inflation, first-time buyers who took out loans during the Covid-lows were caught out. 

The effects of this are starting to play out, with some defaulting and others asking financial institutions for relief. 

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.

FNB data shows that only 17% of South Africans are debt-free, with a quarter relying on loans from family or friends.

The bank’s Retirement Insights Survey for 2024 indicated a growing demand for credit cards and personal loans.

However, banks are unable to meet this demand fully as many clients struggle to repay their debts, leading to an increase in non-performing loans.

Statistics show that around 9.9 million credit-active South Africans, about a third of the market, have missed more than three monthly payments or face adverse judgments.