What the repo rate hike means for bond, vehicle debt

South Africans with home loans have come under fresh pressure following the South African Reserve Bank (Sarb) announcing its eighth successive hike in the repo rate last week – and should brace themselves for more hikes, according to experts.

Read: Sarb lifts repo rate by 25bps

Reserve Bank Governor Lesetja Kganyago delivered the first monetary policy committee (MPC) decision for the year on Thursday, hiking the repo rate by 25 basis points (bps) to 7.25%, effectively pushing the prime lending rate – the rate at which commercial banks lend to consumers – to 10.75%, a level last seen in 2009.

Since November 2021, when the Sarb started raising rates, South Africa has seen a cumulative 375bps increase – from a low of 3.5% for the repo rate and 7% for the prime lending rate. This has added significantly more pressure onto consumers with asset-backed credit such as bonds and vehicle finance.

Homeowners and future buyers should “prepare themselves for the worst-case scenario”, says Adrian Goslett, CEO of property group RE/MAX Southern Africa. He believes there is still space for a further 1% increase over the course of the year considering the Sarb’s concerns around South Africa’s energy crisis and steep inflation.

Middle class ‘most susceptible’

According to consumer strategy, analytics, and research company Eighty20, South Africa’s middle class of over four million people is most susceptible to feeling the effects of even the smallest increase in the repurchase rate.

“What has been most challenging for consumers is how quickly the prime rate has risen….” says Eighty20 director Andrew Fulton.

He says a homeowner who took advantage of low interest rates during the peak of the pandemic and purchased a home worth R1.5 million has seen their monthly repayment of R11 629 rise by almost R3 400 in little over a year.

And it is unlikely their salary grew at a similar rate of 28% over the same period.

“This is the reality facing 2.2 million people with a home loan in South Africa,” says Fulton.

Read: Power crisis: Sarb slashes GDP forecast in half for next two years

How things have changed …

The following table illustrates how repayments on different bond amounts have changed since September 2021, two months before the Sarb took an aggressive stance against inflation and began its hiking cycle. Calculations are based on 20-year terms.

It also reflects the increase in the repayments since last November’s MPC meeting.

Read: Interest rates are up 325bps this year; how this affects your debt

In Finder.com’s Repo Rate Forecast Report for January, Just Property CEO Paul Stevens says first-time buyers are at increased risk.

“I think many of the first-time buyers that entered the market after the easing of interest rates had not taken into account potential increases and not just in their home loans, but along with this all other living costs that they may not be able to keep up with.”

Nedbank economist Liandra da Silva believes homeowners have already experienced the worst of the hiking cycle and that pressure on consumers may start to ease later this year.

“Although homeowners are under more pressure now than they were in early 2022, they [have] likely faced the worst of interest rate hikes already. The Sarb will hike at a softer pace this year, and likely only in the first half of 2023. Furthermore, price pressures are abating, which should offer some support,” she says.

Read: The upside of interest rate increases

Rhys Dyer, CEO of ooba Home Loans, says with interest rates beginning to moderate with the smaller 25bps rise after three consecutive hikes of 75bps each, homeowners are close to “breathing a small sigh of relief”.

“With the exception of a possible single small additional rate hike this year, I believe that we are now out of the woods, and that South Africans can start to plan around the interest rate of 10.75 to 11%,” says Dyer.

“We also believe that this stabilisation will allow more buyers to better budget their monthly repayments, knowing that we are at the peak of the interest rate cycle, with future rate movements likely to be downwards early in 2024.”

Vehicle repayments

Vehicle repayments have also been hit by the rate hikes. According to Eighty20, a third of South Africa’s middle class and 54% of those at the top end of the income band have vehicle financing.

The following table illustrates how repayments for vehicle financing have changed. Calculations are based on a 72-month payment plan at prime plus 2%.