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This is how the interest rate hike will affect you

Image of broken bank

The interest rate hike of 50 base points that was announced yesterday, is the first in several expected this year.

This means the prime lending rate will now be 10.25%.

Image of increasing ratesEconomists expect another rate hike this your to a total of 100 base points (1 percentage point), with more to come in 2017.

Samuel Seeff, chairman of the Seeff Property Group, said the hike for 2016 alone can be as high is 300 base points (3 percentage points), especially if South Africa’s credit rating gets downgraded to junk status.

The rand firmed to R16.08 to the US Dollar on Friday afternoon.

Jacques de Toit, senior economist at Absa, said the MPC’s decision to increase the repo rate again was taken against the background of factors such as the sharply weaker rand exchange rate since last year, antivipated food price increases in the near future due to the severe drought and the possibility of above-inflation electricity tarrif hikes this year.

DebtBusters CEO Ian Wason said consumers need to prepare them for other means to pay their monthly expenses apposed to taking out loans. Before the rate hike, DebtBuster’s Debtometer Report showed that its clients require 102% of their net income to service their debt beore paying for any living expenses.

Middle and upper income earners in particular should watch out for higher living expenses and factor these into their monthly household budgets.

Consumers should tighten up, there’s a bumpy road ahead.

Home loan repayment: Image of home loan application

The 0.5 percentage point interest hike means that you will pay R331.26 more per month on a 20 year bond of R1 million if you pay the prime interest rate. If the rate increase with another 0.5% later this year, your monthly payment will increase with anoter R200.98. If Seeff’s forecast of a total rate hike of 3% for 2016 comes true, you will face a total increase of R2 052.95 per month (almost 22%) this year based on the above scenario.

Vehicle finance:Image of vehicle finance 

You will pay R24.61 monthly more per R100 000 you borrowed over a 60 month (5 year) period on your car, if you managed to negotiate the prime rate when you financed your vehicle. Richard Mahoney from WesBank said you may not feel a R30 increase in your vehicle finance repayment, but it is a different story with several rate increases. Interest rates increased the last 2 years with 2.25%, resulting in a R290 monthly increase on payments for a loan of R250 000 over 72 months at an interest rate of prime plus 1.5%.

Tighten up

Image of jar with savingsIf the above is not reason enough to tighten up your budget, there are more bad news expected. Tax experts at Deloitte predict an increase in Income Tax rates to be announced during the budget speech in February.

If this is not bad enough, Eskom also applied for an electricity rate hike of 17% (although an increase of 8% is expected).

Lesetja Kganyago, president of the Reserve Bank, warned that although the lower price of Brent crude, the weaker rand will probably contribute to a 7c increase in the petrol price in February.

2016 looks to be a very tough year for consumers, especially for those with debt. It’s not going to be easy, but here are some tips to survive:

  • It is very important to design a personal budget and stick to it.
  • Live within your means.
  • Save as much as possible (the higher interest rate will also lead to more interest earned on savings.
  • Don’t make debt for daily expenses. Only use debt to buy expensive assets like property and vehicles.
  • Start an emergency fund for unforseen expenses, like vehicle service or medical emergencies.
  • Distinguish between what you need and what you want.
  • Set up a meeting with your bank or credit supplier before you are in trouble to negotiate relief.
  • If this is not enough, seek the help of a debt counselor. This should prevent prosecution for arrears debt.

Please note that the information provided in this article is based on generic scenarios and should not be taken as tax or financial advice. The circumstances of each individual and employer are different, requiring tailored advice and, where required, customized financial planning. Please contact us should you need any advice on this topic.

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