Global Courant 2023-05-23 15:28:09
South Africans will have to punch another hole in their ever-tightening belts as interest rates are likely to hit a 14-year high this week.
John Manyike, the head of financial education at Old Mutual, said that when interest rates rise, debt payments get bigger and discretionary spending gets smaller, which will add pressure to households that have already faced a slew of increases in recent months and rising cost of living in recent years.
“For example, a person who bought a house for R1,000,000 over 20 years and paid a down payment of R100,000 would have paid R9,137 per month. With the latest rate increase, this would rise to R9,598 (or an additional R461) per month. This is enough to upset an income that is already on the cutting edge,” says Manyike.
Next Thursday (May 25), the South African Reserve Bank (SARB) is expected to raise the country’s interest rate by 25 or 50 basis points.
Stellenbosch Business School Professor Andre Roux believes recent events reinforce the argument for a steeper increase in the basis point to keep inflation within the target range of 3% to 6%.
Roux said that due to the latest exchange rate volatility, the possibility of a higher increase of 50 basis points has increased. This expectation is shared by the Bureau for Economic Research (BER).
As a result of the additional financial burden coming in, Manyike said households should set a strict budget, aimed at reducing debt and diversifying income streams.
Old Mutual said one of the most underrated solutions to surviving high interest rates is to make use of an afterthought.
Take-home pay increases are not matching inflation, the group said, meaning people are getting poorer and have high levels of debt.
“No matter how hard you try to stick to your monthly budget, there may be no room for maneuver. Therefore, any advice that encourages people to stick to their budget may not be the ultimate solution. It is high time people explore alternative income streams to save for rainy days, pay down debt and create wealth,” said Manyike.
In tough times, there’s no harm in consolidating debt “when push comes to shove,” Manyike said. However, the financial consequences of such a move must be taken into account.
He added that it is not ideal to agree to a payment freeze in this interest rate cycle as it is difficult to accurately predict how long it will last.
Manyike shared the following tips and tricks for struggling households:
Have a budget and always have some cash ready to deal with unexpected things like rate increases. Look at the total cost of a loan and interest rather than the monthly payment. For example, a major retailer is currently offering a 55-inch TV for a cash price of R7,999. On credit this means R370 per month for 36 months or R13,301 as the interest rate is 21.75%. Is paying an extra R5,302 for a TV worth it? Buy down instead of up. Even if you’re buying in installments, buying at a price below the maximum you can afford means you won’t be stressed if rates rise. It also means you can pay more for the item each month, pay earlier and save interest.
Read: What to expect from the Reserve Bank interest rate announcement this week
