A shock to the home finance landscape

The last three years have seen finance costs soar in South Africa, with the prime lending rate rising 4.75% since July 2020. According to Leonard Kondowe, Finance Manager for Rawson Finance, this has had a significant impact on consumer affordability, dramatically reducing the pool of qualified applicants on the home loan market.

“Lenders are hungry for qualified bond applicants at the moment,” he says. “They are fighting for every client who meets their affordability criteria, which gives strong applicants a valuable bargaining chip during negotiations.”

Despite the hot competition, however, Kondowe says finance offers have cooled to some degree.

“We’re definitely not seeing big concessions like prime minus 1.5% on a regular basis as was the case before,” he says. “Anything below prime can be considered a good deal, with most offers falling between prime and prime minus 0.45%.”

Bonds of 100% to 105% are still available, but Kondowe notes that these inevitably come with less favourable interest rates. Instead, he strongly recommends prospective buyers save for a deposit, where possible, in order to secure the lowest possible interest rates and minimise their monthly repayments.

“We’re in a volatile economic situation right now,” he says. “Interest rates could keep climbing for some time to come, which means it’s important to think ahead in terms of affordability. Banks do some of this work for you by taking interest rate fluctuations into account during their affordability assessments. That said, it’s not wise to rely on this, alone.”

Rather, Kondowe recommends buyers ensure that their monthly repayments start off at a level where they can safely afford interest rate increases of at least another percent or two. This, he says, can either be done by buying below their maximum qualified amount threshold, or by opting into a longer loan term of 30 years instead of the usual 20.

“Just remember: the longer your loan term, the more interest you pay over its lifetime,” he says, “so I wouldn’t choose that option unless you’re confident you can put more than your minimum repayment in from early on. Going through the prequalification process is a great opportunity to run the numbers for various scenarios with the help of your bond originator and find the best – and most future-proof – finance structure for your needs.”

But what about current bondholders who did not have the luxury of foresight and now find themselves in financial difficulties?

“This is unfortunately becoming a fairly common situation,” says Kondowe. “Thankfully, there are options available to help struggling bondholders weather these tough times.”

Those options include bond renegotiation (for bondholders with equity), debt restructuring and even debt consolidation for those with multiple loan accounts.

“The first step is to approach your lender – the sooner the better,” says Kondowe. “Never wait until your situation is critical, and always focus on paying off – and closing out – your most expensive debt first.”

While today’s interest rates may seem dire by recent standards, Kondowe says it’s important to maintain a little perspective.

“In 1985, interest rates hit a high of 25%, reaching almost as high again in 1998 to around 24.50%,” he says. “Today’s 11.75% pales in comparison. The real challenge isn’t how high the interest rate is, but how quickly it’s gotten here. We grew accustomed to cheap finance during COVID, and getting back to reality has been a shock to the system.”