The R70,000 cost of high interest rates in South Africa

Interest rates at 15-year highs have made living more expensive for South Africans, especially those with home loans and car repayments, costing them an extra R71,000, on average, since rates where put on hold in May 2023.

The South African Reserve Bank’s (SARB’s) Monetary Policy Committee voted to keep rates unchanged on Thursday (18 July), keeping rates at their highest point since 2009.

This means the repo rate remains 8.25%, and the prime lending rate stays 11.75%.

Notably, the decision was not unanimous – breaking from the trend seen over the past year.

Four members of the committee voted in favour of the hold, and two voted in favour of a 25 basis point cut, reflecting a turn in sentiment and pointing to the cutting cycle getting closer.

Since the rate hike cycle began in November 2021, rates have increased by 475 basis points, reaching the highest levels in 15 years.

These rates have been unchanged for over a year, adding to household financial pressures, which have also had to deal with other increases such as electricity, fuel, and property rates.

This is especially true for South Africans who are actively serving a home loan, car loan, or both.

Mortgages and vehicle asset finance are among South African households’ biggest debt items—meaning interest rate hikes have had a material impact on their bank accounts.

Based on Lightstone’s first quarter 2024 data, the average property value in South Africa was R1,377,014.

This means that if someone bought a house at this value at the beginning of the interest rate hike cycle at 7% (prime rate as of September 2021), they would have been paying an extra R4,247 monthly on their bond repayments at 11.75% (prime rate since May 2023).

This amounts to an extra R59,458 from May 2023 to July 2024. However, the additional cost increases with the price of the home.

For example, those who bought a R2 million house pay R6,168 extra per month, while those who purchased a R5 million house pay a considerable R15,420 per month.

Since May 2023, this has resulted in an additional R86,352 and R224,880, respectively. The same increase in costs can be applied to those with car loans.

WesBank also noted that the average amount for a new vehicle financed through their institution was about R358,390.

Those who purchased a car valued at this amount at the beginning of the interest rate hike cycle have been paying an additional R834 per month on their car loan at the current prime rate.

Assuming a 60-month (five-year) payment term and a 0% deposit, this results in an extra cost of R11,676 over the past 14 months.

Like home loans, the additional cost increases with the vehicle’s price.

Those who bought a R500,000 car pay an extra R1,161 per month, while those who purchased a R1 million car pay a significant R2,320 extra per month.

This translates to an additional R16,254 and R32,480, respectively, since May 2023.

For those who are unfortunate to be paying off both of these debt classes, the extra cost ramps up to R5,081 per month, on average—equating to an extra R71,134 as of July 2024.

The extra financial burdens are starting to bite

The Prudential Authority highlighted the increasing pressure consumers and businesses are experiencing as a major risk to the country’s banking sector.

The authority regulates the country’s banking sector and helps prepare it for any future risks to financial stability.

As stated in the annual report, the performance of residential mortgages has been particularly affected by the increase in interest rates since November 2021.

The total defaults on this type of loan increased by 36% year-on-year until the end of February.

This rise is due to a significant increase in first-time home buyers taking up home loans because of the unusually low cost of borrowing from 2020 to the end of 2021.

This was a result of the Reserve Bank cutting interest rates to boost the economy during the Covid pandemic.

The increasing defaults on residential mortgages are just one aspect of the challenges faced by South African households.

The rising cost of living has compelled them to resort to other forms of debt to sustain their lifestyles.

Many South Africans are also opting to skip insurance premium payments and stop contributing to their retirement funds in order to make ends meet.

Data from TransUnion showed similar stress signs, which highlighted that home loan delinquencies have worsened by 140 basis points year over year.

The data on vehicle loans showed similar signs of stress, with TransUnion adding that vehicle asset finance delinquencies have worsened by 20 basis points year over year, reporting a delinquency rate of 5.4%—measured as a percentage of accounts three or more months in arrears.

As a result of these pressures, FNB has noted that homeowners are selling their properties and downgrading due to affordability concerns.

Additionally, WesBank has noted a trend of car owners holding onto their vehicles for longer due to financial constraints.

As a result, the new vehicle market has experienced a decline in sales for most of 2024.

Read: Standard Bank warning to South Africans earning over R25,000 per month