R4,200 per month blow for homeowners in South Africa leaves a mark

High interest rates in South Africa have been a notable contributor to the financial strain on homeowners for the past year, forcing many homeowners to downgrade and delinquencies to rise.

Since May 2023, with interest rates held at 15-year highs, it costs those with bond repayments on average an extra R4,247 per month to cover their loans, which has put households under severe pressure.

This has rippled across homeowners with existing loans as well as first-time homebuyers in the country.

Data from TransUnion shows that in the first quarter of 2024, the number of new home loans increased by 6.7% compared to the previous year, but the average value of new loans decreased by 6.2% during the same period.

This suggests a rise in the more affordable segments of the South African property market, partly driven by downgrading due to financial strain and first-time home buyers.

Although new loan amounts have decreased, the total outstanding home loan balances have increased by 7.6% year over year.

TransUnion said this is because existing home loan borrowers are using their home equity to access liquidity.

Consumers are probably tapping into their existing home loans because they offer more favourable interest rates compared to obtaining new credit for consumption-related products, given the high cost of living.

At the same time, home loan delinquencies have worsened by 140 basis points year over year, warning lenders to take a more proactive approach in anticipating and managing delinquencies that could arise from consumers facing payment difficulties due to high interest rates.

This is unsurprising when you consider the increased costs associated with the latest interest rate hike cycle.

In May 2024, the South African Reserve Bank’s (SARB’s) Monetary Policy Committee decided to keep interest rates unchanged.

The repo rate remains at 8.25%, and the prime lending rate stays at 11.75%. This decision was unanimously agreed upon.

Rates have increased by 475 basis points since November 2021, marking the highest levels seen in 15 years.

Interest rates have been steady at this level since the last policy rate decision a year ago, adding financial pressure on households as they also grapple with other increased costs, such as electricity, fuel, and property rates.

According to Lightstone’s data for the first quarter of 2024, the average property value in South Africa was R1,377,014.

This means that those who purchased a property at this value at the beginning of the rate hike cycle at 7% (prime in September 2021) have been making additional bond repayments of R4,247 per month at the current 11.75% prime rate (since May 2023).

This equates to an additional R50,964 over the past year (from May 2023 to May 2024).

However, this cost increases with the price of the home.

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

This adds up to an extra R74,016 and R185,040, respectively, since May 2023.

According to TransUnion, this is partly to blame for the credit bureau’s serious home loan account delinquency rate of 7.2%—measured as a percentage of accounts three or more months in arrears.

Standard Bank also recently signalled concern that the level of home loan distress is rising.

Commercial banks initially benefit from rising interest rates as they collect more interest from their existing set of loans, greatly increasing their profit margin.

This is compounded by the fact that the interest rates offered on savings accounts do not rise as fast as the interest rates charged on loans.

However, as interest rates remain elevated for longer, this effect wears off as clients begin to face pressure and cannot pay off their loans.

This resulted in Standard Bank keeping its lending taps tightly shut, as it expects the credit loss ratio for the period to be above the top of the groups through the cycle target range of 100 basis points.

For example, the growth in home loans was nearly flat at only 2% for the year, and loans to small businesses declined by 5%.

Credit cards and unsecured lending also had limited growth at a mere 2%.

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