The rate hike and your finances

2014-02-02 10:00

In a somewhat unexpected move, the repo rate increased from 5% to 5.5% this week. This was the first time the rate has changed in 18?months and it has been more than five years since the last interest rate increase.

What does this mean for you? In a nutshell, your debt repayments that are linked to the interest rate, such as your home loan and vehicle finance, will increase. At the same time, the rate increase is good news if you are saving money or are a pensioner with retirement savings.

Lezanne Human, the chief executive of First National Bank’s savings and investments division, points out that although savers will be excited about the increased return on their cash investments, the higher cost of servicing debt may result in consumers cutting back on their savings.

According to FNB property strategist John Loos, there could be a slowdown in residential house sales as some buyers adopt a “wait-and-see” approach, postponing their residential purchase until the interest rate hiking cycle appears to have passed.

“The impact is also expected to raise the portion of these sellers who downscale into rental properties for the time being as opposed to buying a cheaper property,” said Loos.

All these factors are likely to lead to a stronger growth in demand for rental properties. Ian Wason, the chief executive of debt counselling firm DebtBusters, warned that there may be troubled times ahead for consumers with home loans.

“The increase of just 0.5 percentage points will have a massive impact on consumers with home loans. Not only are these consumers already faced with price hikes in electricity, rates and petrol, but many of them are overloaded with unsecured debt as well.

“This may be the final straw for many of them and I would expect to see a large spike in defaults on the banks’ home loan books in the month ahead,” he said. If you are paying off a home or a car, you should factor in the possibility of further interest rate hikes.

Get rid of short-term debt such as credit cards and store cards, and build a financial cushion so that you are able to meet your financial commitments if the interest rate continues to rise.

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