What is happening with home loan deals and interest rates?

If you are considering getting a home loan or you are already a homeowner, you probably know that interest rates, inflation, and home loans get a lot of coverage these days.

The impact on you will depend on what type of mortgage you're looking for or what type of deal you're currently in - and how much longer your loan term is.

Chief Economist for Nedbank Group, Nicky Weimar answers some questions buyers and homeowners might have.

Is it a good time to buy when the interest rate is high?

Property investment is driven by many objectives, but for the vast majority of individuals, the decision is motivated by the desire to own their property/house. Buying a property converts a necessary monthly expense into an investment in an asset with an intrinsic, although variable, value.

In simple terms, owning a house enables the owner to get a future return when the property is sold. It also provides the owner with collateral for future borrowing, which can often be obtained at much more favourable terms once some equity has been created in the asset.

The cost of the investment depends on the price of the property, the cost of financing the assets or the interest rate on the mortgage, the administrative cost of the purchase, and the long-term commitment to maintaining the property (insurance, rates, taxes, etc). Prospective owners are therefore exposed to changes in the value of the property and changes in interest rates.

When interest rates increase as is currently the case, the cost of financing rise, and demand for credit tend to weaken over time lenders also tend to tighten credit standards, resulting in lower house prices. As house price decline, it can be a good time to buy a property if you have enough fat in your monthly budget to withstand the risk of potential further interest rate hikes. 

What are the pros and cons of buying property when the interest rate is high?

The pros related to the opportunity to get a property (an asset) at a lower price than would prevail at a time of falling interest rates and rising domestic demand.

The cons relate to the risk that the cost of financing the property could increase over the short to medium term as interest rates increase further.

At the moment the prime lending rate has already increased by 2.75% (275 basis points) from 7% in November last year to 9.75% in September. The Reserve Bank has hiked interest rates as inflation not only surged above the 4.5% midpoint of the central bank targets but also above the upper 6% limit of the country's legislative target range.

Inflation is a dangerous economic phenomenon. If left to run amok, inflation becomes entrenched and starts to feed off itself, persistent and repeatedly eroding purchasing power, and ultimately hurting economic growth and job creation. The initial acceleration in inflation was driven by surging fuel and food prices on the back of rising global oil and food prices worsened by Russia's war on Ukraine, which disrupted and unsettled global energy and food supplies.

"While some of these price pressures are now receding, as evident in the series of petrol price cuts we recently endured, it will take time to return inflation to the Reserve Bank's 4.5% target," says Weimar.

"In August, our headline inflation rate receded to 7.6% from a recent peak of 7.8%, still far above the target. As a result, we believe that Reserve Bank will increase the interest rate further, probably by another 1.25% to a peak of around 11%. Any prospective buyer must be able to handle the potential rise in their monthly bond repayment. While landlords also tend to increase rentals in times of rising interest rates, it only affects rentals with a considerable lag and often landlords do not have the luxury of passing the full cost of the rate hike onto consumers."

However, growth in house prices is also starting to moderate. According to Lightstone's House Price Index, growth in house prices has slowed from a recent peak of 6% in June last year to a much more modest 3.2% in August this year. Essentially prospective buyers will have to weigh these forces - rising financing costs versus lower house prices against each other.

Predictions of the property market and where do that put the property investors in SA?

Buying a property is not only a long-term investment in an asset but also in the prospects for South Africa. Property price growth has been subdued since the Global Financial Crisis and the recession that followed in 2009.

While property prices have rebounded strongly in other developed and developing countries, the underlying stagnation of the local economy caused by political turmoil, policy uncertainty particularly surrounding expropriation without compensation, state capture, widespread corruption, and the resultant worsening of structural constraints such as the country's acute electricity shortage has stunted the recovery in the residential property market.

Many of these underlying challenges have not been resolved. Although the government is slowly adopting more market-friendly policies, these words have not yet been translated into tangible actions that materially change conditions on the ground for the vast majority of South Africa. As a result, the country's growth prospects remain muted, and the downside risks are considerable. These concerns will continue to weigh on both the residential and non-residential property markets.

From a cyclical perspective, growth in property prices and sales is likely to slow further as interest rates increase. On the upside, the property is fairly priced in South Africa. "We have also seen strong and persistent demand for affordable housing and robust growth in property prices in the coastal cities of South Africa. Provided prospective buyers choose wisely, chances are good that they could secure a sound asset that will provide a reasonably healthy return over time," says Weimar.