Affordability, potential defaults in the spotlight as interest rates increase

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Credit bureaux are worried that the rising interest rate cycle could cause more consumers to default on their debt.
Credit bureaux are worried that the rising interest rate cycle could cause more consumers to default on their debt.
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  • The SA Reserve Bank's monetary policy committee hiked the repo rate by another 25 basis points to 4% on Thursday.
  • SA's household debt to disposable income ratio was already high before the November 2021 rate increase, and it climbed after that hike.
  • Credit bureau companies are worried that the rising interest rate cycle could cause more consumers to default on their debt.

Since July 2020, South African consumers have enjoyed the lowest interest rate in almost five decades. The South African Reserve Bank (SARB) cut the repo rate five times in the space of four months in just one year.

Now, the central bank has raised the repo rate in two successive meetings, and Allan Gray reckons SA has entered a slow and steady path of "normalisation" of its interest rate.

But many consumers took advantage of the record-low interest rates. The residential property market was flooded with young buyers in the past two years, and their average purchase price climbed to around R1 million – a significant increase compared to previous years.

And it's not only first-time buyers who flexed their increased spending power. Banks reported that there has been a lot of opportunistic buying too, from people who already owned homes. They went out and bought themselves additional properties or upgraded to something bigger and better.

Now that the interest rates are rising, credit providers and credit bureaux are worried that consumers could face increased financial stress.

TransUnion Africa pointed out that its fourth-quarter Consumer Pulse Study showed that many remained "highly concerned" about their ability to pay their bills and loans.

The last National Credit Regulator's Credit Bureau Monitor showed that even before the first interest hike, the number of consumers with impaired credit records increased by 98 892 to 10.17 million between July and September 2021. The number of accounts no longer in good standing increased from 19.86 million to 20.16 million.

TransUnion is worried that the rising interest rates could push up the default rates across the country, said the credit bureau's director of research and consulting, Weihan Sun.

"We're going to see increased average balances on existing credit facilities and a potential rise in delinquencies among some consumer segments as a result," said Sun.

Sebastien Alexanderson, CEO of National Debt Advisors, said because of the rate hike - and with the price of basics like fuel, food and electricity expected to escalate further - consumers will have to tighten their belts even more. He reckons avoiding additional debt is the best strategy to stay afloat, given that the ratio of household debt to disposable income was already high before the November 2021 rate hike.

Sun said following the rate increase in November 2021, South African households had an average debt to disposable income ratio of 76%, and the latest increase could push this as high as 77%.

Even though taking out additional debt might seem like the only way to make ends meet for the increasing number of consumers who were already relying on credit cards to meet monthly expenses before the rate hikes, Alexanderson said the first port of call should be reviewing all expenses.

"You should be checking your car insurance, life insurance and medical aid to ensure that you are getting the best rates and deals," he said.

However, Alexanderson is less concerned about the potential debt spiral among consumers than TransUnion. He said National Debt Advisors has observed a positive shift in consumer debt behaviour over the last two years. He hopes that will continue this year.  

"Some of the unhealthy spending trends that we have seen in the rest of the world seem to have been significantly more subdued locally," he said.

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