Homeowners with a flexible rate mortgage bond will have seen their monthly repayments escalate yet again following last month’s 0.5% increase in the lending rate. And those in the know predict that further rate hikes may be on the cards for later this year.
With pockets already squeezed, Niel Fourie, public policy actuary at the Actuarial Society of South Africa, warns that now is the time to shock proof your finances against further interest rate hikes by curbing your spending and prioritising paying off your debt.
Fourie states that the most critical step towards reassessing your spending habits and making meaningful changes is always drawing up a budget.
“Without a clear overview of how you spend your money every month and how much debt you are really servicing, you will not be able to identify and address your most expensive debts such as credit card or vehicle repayments. Remember that overdrafts will limit your ability to focus on your long-term goals such as repaying your home loan or investing towards your retirement,” he explains.
“So let the National Budget speech ahead inspire you to relook your own budget for the year, and identify places you can cut back your spending, beginning with ridding yourself of expensive short-term debt,” he says.
“You will then be able to make provision for any further financial shocks such as further interest hikes during the year, which would make debt even more expensive.”
To demonstrate the effect the rising interest rate has had on your finances, Fourie explains that if you took out a mortgage bond of R1 million two years ago when the prime lending rate was 9% and the bank set your personal rate at 10%, your monthly repayments then would have been R9 650 a month.
Since the interest rate has been hiked four times since February of 2014, this month your mortgage bond repayment would have been R10 500 – an increase of R850 over the two years.
After two years of repayments, you would still owe R966 000 in total.
If South Africa continues to experience low economic growth as expected and the interest rate goes up another 0.5% this year, your monthly mortgage repayment, based on the example above, would increase to R10 850, an extra R350 a month.
“The increases in the interest rate may seem small at the time, but the effects can snowball on your personal balance sheet if you are not prepared. The key is to factor in these costs early, so that they do not derail your budget entirely and land you in a debt-trap,” says Fourie.
He points out that if you commit to increasing your bond repayments now, not only would you have a financial buffer already built into your budget to absorb the shock of a further interest rate hike, but you could be saving yourself thousands in debt repayments down the line.
He says that based on the current interest rate, if you were to increase your monthly bond repayments by just R500 for the balance of the term of the bond (or 20 years), you would eventually have saved R260 000 more than if you were to keep paying the current minimum.
“That’s why the best way to prepare for the year ahead will be to give up that daily cappuccino, weekly manicure, expensive subscription or try to save on water and electricity and channel any extra money into your bond, starting now,” he states.
Fourie adds that if you have any investments such as fixed deposit accounts, it would also be wiser to rather put any spare money into repaying your debt instead, as the returns from your investments are unlikely to outperform the interest charged on your loan.
For example, he notes that if you were to invest a R10 000 lump sum in a fixed deposit account with a return of 8.3% at maturity after 24 months, you would end up with R11 400.
However, if you were to put this R10 000 lump sum into repaying your bond instead, the compound effect of interest means that after the same two year period, you would actually have repaid R12 160 of your debt – nearly R1 000 more than you would have made on your investment.
He states that consulting a qualified financial adviser will be one of the most important steps you can take for your financial health this year, as an adviser can help you to identify problem areas in your budget, set out your financial goals and develop a long-term strategy that will act as a buffer against any future financial difficulties or unexpected events.
“Curbing your spending and prioritising debt repayments in your budget is also some of the most important advice you can receive,” says Fourie, “But our poor savings rate as a nation and high levels of debt, even among the wealthy, prove that too many of us choose to ignore it.”
“However, every day that you ignore planning your budget and taking control of your finances is a day that you are making a financial decision that could cost you significantly in the future.”