The latest repo rate increase of half a percentage point - announced this week by Reserve Bank governor Tito Mboweni - takes the prime rate to 14.5 percent, which should make you think twice before you reach for your wallet this festive season.
What does the latest interest rate increase mean for you and what can you do to alleviate financial stress in the year ahead?
Needs vs wants
One of the first things you should do is draw up a budget that distinguishes between your needs and your wants. Your needs are essentials such as accommodation, food and electricity. Your wants are the things you would like to have, such as a big-screen television or designer sunglasses.
The prime rate has increased by a total of four percentage points since May 2006, when it was 10.5 percent. This might not sound like much to the uninitiated but it makes a significant difference to anyone who is paying off a home loan or any other type of debt.
As a rule of thumb, a 0.5-percentage-point increase will push up your monthly mortgage bond repayment by about R35 for every R100 000 outstanding on the bond, June Tudhope, the managing director of Nedbank Homeloans division, says.
Fixing your rate
You can fix your home loan rate so that you don't have to stress every time interest rates increase. However, the interest rate on your home loan is usually fixed marginally higher than the prevailing prime rate. So, although fixing your home loan interest rate does safeguard you in the event of any future increases, you may have to sit through more than one interest rate hike before your fixed interest rate is lower than your rate if you had left it to fluctuate.
It may be worthwhile to consolidate all your debt through your home loan because the interest rates on the latter are lower than those on other forms of debt.
You would then have to make only one loan repayment at the end of each month.
Adams says Standard Bank will repossess your home or vehicle only as a last resort because the prices obtained are often at a discount to the property's normal market value. This increases the bank's loss, as well as the shortfall in the amount you have to repay the bank.
The arrangements the banks may offer you if you are finding it difficult to meet your home loan or car repayments include:
- Spreading the repayment of the arrear amount over an agreed period of time so that you can catch up on your repayments.
- Increasing the period of time over which you repay the instalments in order to reduce the amount you repay each month. However, the interest will be calculated over a longer period of time, which means your debt will be more expensive in the long run. To avoid the higher interest charges, you should increase your repayments as soon as you can afford to do so.
- Reducing your repayments for an agreed period of time, after which you must be able to meet the normal repayments. The bank will either extend the term of your repayments or will spread the outstanding amount over the remaining period of the loan.
- Suspending your repayments for an agreed period, depending on certain criteria being met. After this period, you must be able to meet your repayments.
- Surrendering collateral to the bank. Collateral refers to an asset, such as your car or house, that is used to secure a loan. If you cannot meet your debt obligation, the bank will sell your asset to recoup all or part of its losses.
- Assisting you to sell your property so that proceeds from the sale can be used to pay off your debt. However, if you are unable to meet your repayments in the medium term, it is better to try to sell your home or car under normal market conditions as soon as possible to get the best price and not to wait for the bank to repossess it.
- A voluntary debt review process in terms of which a debt counsellor will review your budget with you and choose a plan of action to help you pay off your debt.
extracts from article on Personal Finance here