Interest rates are up 325bps this year; how this affects your debt

Most South African household budgets are in for another squeeze, as consumers with home loans, vehicle financing and other forms of credit face more pressure on the back of the South African Reserve Bank’s (Sarb’s) latest interest rate hike.

The central bank delivered its final monetary policy statement of the year on Thursday, hiking the repo rate by a widely expected 75 basis points (bps) to 7% – pushing it to above pre-pandemic levels.

Watch/read: Sarb hikes interest rates to above pre-Covid levels

The bank expects inflation to remain above its 3% to 6% target band until the second quarter of next year, and to track lower to the midpoint of the band in the second quarter of 2024.

The repo rate sat at 3.75% at the start of 2022 and has risen six times, by a cumulative 325 basis points.

Over the same period, the prime lending rate – the rate at which commercial banks lend to consumers – has risen from 7.25% to 10.5%.

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On average, an increase of 25bps points adds R250 to the repayments on a R1 million home loan, according to Siphamandla Mkhwanazi, senior economist at FNB.

He adds that critical economic data all point to faltering resilience in the household sector.

How things have changed since January …

The following table illustrates how repayments on different asset-backed credit have changed since the start of 2022 – prior to the interest rate hikes.

A 20-year bond of R800 000 taken out at the prime interest rate now costs R1 664 more per month; the repayment on a bond of R1 250 000 is now R2 600 higher; and the holder of a bond of R3 million will pay R6 240 more each month.

If you bought a car costing R430 000 and financed it over 72 months at prime plus 2%, your repayment at the start of the year was R7 804 – and you would now be paying R715 more each month.

For R250 000 in vehicle finance on the same terms, the consumer will be paying R416 more in monthly repayments.

Credit card debt

According to data supplied by TransUnion, the average credit card balance in South Africa is R21 200.

This is how the repayments for different settlement terms have changed since the start of the year, using the average credit balance.

Repaying credit card debt of R21 200, over six months at a lending rate of 15%, will now cost R3 723.78 per month – compared with R3 689.52 in January. This means a consumer will be paying R34.26 more.

Over 12 and 18 months, consumers are paying R32.66 and R32.65 more respectively.

Mkhwanazi says consumer spending is not likely to moderate going into 2023, since an acceleration in the uptake of unsecured lending may continue.

“That’s an expensive endeavour in itself, and they are doing that at a time when debt service costs are rising at such a high pace,” he says.

“We believe that this is indicative of a household that is under enormous pressure, and they might be using that credit to supplement their [earnings].”