HOMES: How the interest rate impacts the property market
A bank’s decision when assessing a buyer’s affordability is driven largely by the prime lending rate.
NEWCASTLE ADVERTISER – South Africans breathed a sigh of relief when the South African Reserve Bank kept the repo rate at 7%.
With the majority of current and prospective homeowners dependent on home loans to purchase property, any fluctuation in the interest rate has a major impact on the property market.
Stability in the interest rate will build consumer confidence and give them more time to sort out their financial situation and prepare for the year ahead. The prime lending rate has a substantial influence on the property market and potential homebuyers’ ability to get their foot on the property ladder.
An increase in the prime lending rate widens the gap for prospective homebuyers to meet the criteria set out by financial institutions to obtain a bond. A higher rate means higher bond repayments for homebuyers or having to opt for a lower bond amount.
In certain instances, this could potentially push lower-income earners out of the market completely. The interest rate directly affects the affordability levels of buyers wanting to purchase property.
In turn, affordability ratios will have an influence on the amount that the bank is willing to give the buyer, which could impact on the kind of property the buyer will be able to purchase.
A bank’s decision when assessing a buyer’s affordability is driven largely by the prime lending rate. As interest rates increase, the buyer’s ability to reduce debt levels comes under pressure.
Lower debt levels will increase an applicant’s chance of bond approval and will make affording a home much easier. It’s not just new entrants to the property market that are affected by rate fluctuations, current homeowners can be adversely affected by rising interest rates.
This can be mitigated by choosing a fixed interest rate.
Homeowners with bond accounts linked to the interest rate will have to face either higher or lower bond repayments if the rate increases or decreases respectively.
Where the rate remains stable and the homeowner’s income increases, it will give them the opportunity to pay additional funds into their bond account and reduce the term of their loan by several years.
The money saved on interest can be put towards retirement or perhaps a child’s education.
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