Unpopular Opinion About Interest rates

Interest rates have went up in South Africa with the repo rate sitting at 7% and it might as well be the right time to buy that car or house. Sounds ironic right?

Here’s the logic – periods of lower interest rates are only temporary and don’t provide a true reflection of your affordability. The instalment amount that you are quoted during periods of low interest rates doesn’t take into account future interest rate hikes and as a result, people who take credit when interest rates are low are most likely to default on their loan repayments when interest rates increase.

At the moment, interest rates have reached pre-covid19 levels (are back to normal), implying that the amount that you ought to be quoted by taking a loan today is most likely the maximum amount you can ever pay. Also, this implies that interest rates are most likely to remain the same, in which case you are covered, or they might deteriorate, in which case you’ll realize savings. Even if they are to go up, it would be by a relatively smaller margin. People who took loans when interest rates were low are paying +30% more than they had budgeted for and because salaries increase at a relatively slower rate, this is most likely to cripple their budgets.

When you decide to buy a car or house, you should factor in unfavourable economic conditions so that when the cost of living increases, your budget will be able to accommodate the additional spending.

Here’s my proposal – under normal circumstances, the repo rate would sit at 7% and the prime rate at 10.5%. When banks quote you, they use the prime rate, usually (prime +3%) depending on your credit record. With a favourable credit record, you can even get (prime minus). When you take a loan, especially during periods of low-interest rates, add your margin to the prime rate of 10.5%, this will give you almost a true reflection of your affordability as well as an idea of how much you will pay when interest rates return to their normal level. Factor this into your budget and should interest rates go up, you will be covered.

Of course, the situation is different under fixed interest rates. But also, most people opt for repo-linked rates, some due to risk appetite and some due to a lack of knowledge.