How rate cuts benefit everyone in real estate
The whole real estate industry is celebrating following this week’s Reserve Bank announcement of a 0,25 percentage point cut in interest rates. This will take the repo rate from 8,25% to 8% and the prime lending rate (and home loan base rate) from 11,75% to 11,5%.
“Most economists agree that it also signals the start of a rate-cutting cycle that will last well into next year and may well see the prime rate fall to below 10% - barring any unforeseen global or local disasters that cause a sudden increase in inflation,” says Stephen Whitcombe, MD of the Firzt Realty group.
“As it is, the annual inflation rate has been declining since the start of this year and dropped to 4,4% in August, down from 4,6%. This puts it below the midpoint of the Reserve Bank’s preferred 3% to 6% range and, given the current strength of the Rand, it is expected to decline even further and create space for further rate cuts.”
In the macro-economy, he notes, these cuts will speed up economic growth and job creation while in real estate, they will have the following positive effects on various participants:
*For existing homeowners, the majority of whom have variable-rate home loans, interest rate cuts mean an immediate decline in the minimum monthly repayment. This makes the loan more affordable and reduces the chance of them defaulting and losing their home. This week’s rate, for example, will immediately reduce home loan repayments by around R17 for every R100 000 outstanding – or R170 per R1m.
“This may not seem like much, but rate reductions also mean smaller repayments on other forms of debt such as car finance, personal loans and credit and store card balances, and the combined savings give homeowners even more ‘room to breathe’.
“In fact, they may even give them an opportunity to pay off more than the minimum on their home loan each month – a practice which will increase their equity in the property - and could save them many thousands of rands over the life of their home loan.”
For example, paying just R200 a month more on a home loan of R1m would cut your repayment time by 14 months and save you almost R125,000 worth of interest on a 20-year loan with an interest rate of 11,5%.
As lower interest rates make homes more affordable, homeowners are also likely to see the demand for housing go up and the value of their properties increase.
*For homebuyers, interest rate cuts mean smaller home loan repayments and greater affordability. This means, says Whitcombe, that buyers may be able to purchase a home sooner than they thought, or that they may be able to afford a more expensive home than they could at higher interest rates.
The most important factor in these decisions is the fact that at lower rates, they will need to earn less to qualify for a home loan. Using the rule of thumb that the monthly bond repayment should not exceed 30% of gross household income, buyers would need an income of R36 100 to qualify for a R1m home loan at 11,75%, but only R35 500 to qualify for the same loan at 11,5%.
“In addition, lenders tend to lower deposit requirements when interest rates fall, and to be more willing to advance credit, making home ownership even more affordable and attainable.”
*For investors, he says, lower interest rates are positive because they improve the return on investment (ROI) by reducing the cost of borrowing and increasing the percentage of rent retained after expenses.
“In addition, as property prices increase, they also gain from the appreciation in the value of their assets.
“And they also face less risk of tenants defaulting because lower interest rates reduce the overall debt costs of tenants and make it easier for them to afford the rent each month.”
*For property developers, lower interest rates usually translate fairly quickly into higher housing demand and more sales, especially for those operating in the first-time buyer market.
“In addition, rate cuts make it cheaper for them to borrow the funds they need to buy land and build new projects – and that is good for the whole market, and the economy as a whole, because it enables even more South Africans to rent or buy a decent home.”
Issued by Firzt Realty
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About Firzt Realty
Established in 2003, Firzt initially focused on residential real estate, but has since expanded to offer a broad range of services in both the residential and commercial property sectors, including sales, rentals, auctions and property management.