Rising interest rates, high inflation and cost of living have resulted in many homeowners defaulting on their monthly bond repayments, with some being forced to sell their properties to reduce expenses.
Data from Absa’s home loan division shows the extent to which consumers are experiencing the negative effects of the cost-of-living crisis. Home loan repayments have increased as much as 40% since the start of the rate hike cycle in 2022, said Mbuyiselo Khumalo, head of collections for home loans at Absa.
In July 2020, the prime rate was 7% and reached 11.25% in March 2023 — with nine consecutive increases of as much as 75 basis points.
“The interest rate hikes are just one side of the consumer stress story. Rising inflation has seen increases in the price of essential goods like food, petrol and utilities — all of which add further financial strain to the consumer,” said Khumalo.
Furthermore, challenging macroeconomic factors such as increased load-shedding have all contributed to the rising pressure felt by consumers.
According to the Absa Homeowner Sentiment index for the third quarter of 2023, homeowners surveyed did not see current conditions as a good time to buy or sell property, with many taking a wait-and-see-approach and spending sparingly.
“Those looking to sell acted out of need and to cut down on expenses as well as free up cash flows,” according to the survey.
Absa says the interest rate hiking cycle is near its peak with rate cuts expected in the second half of 2024. The survey revealed that would-be first-time buyers feel renting is more flexible, affordable and less costly than owning a home right now, but still aspire to own a home of their own. High interest rates, economic instability, high cost of living and high prices were among the reasons hindering people from buying property.
“Though consumer strain will likely persist in the short term, we expect home ownership to remain aspirational for many South Africans and as conditions ease more activity will return to the market,” said Khumalo.
The home loans industry has seen the negative effect of increased consumer stress with “more consumers missing their bond payments or making late payments”.
To hold on to their homes, many homeowners have entered into legal processes including paying arrears over an agreed time to banks. Arrangements to pay reduced amounts for a predetermined time, while the homeowner remediates their finances and restructuring of loans over an extended term have been helpful to consumers in light of the increase in bond repayments.
“These payment arrangements remain unaffordable for many homeowners who resort to selling their properties privately or through our bank-assisted sales, with the intent of reducing their debt commitments and possibly downgrading to more affordable homes,” said Khumalo.
Where homeowners made no payment arrangements, and property sales were not possible, the bank resorted to a legal process. “We have found that over 90% of accounts that enter the legal process end up being resolved through payment restructures, assisted private sales and settlements.”
Khumalo said proper planning when budgeting for unexpected expenses is important as is paying extra amounts on monthly bond repayments since this reduces the loan balance with the added benefit of reducing the interest rate burden.
Homeowners also need to speak to their banks as soon as possible when they are unable to make their bond repayments as banks offer various debt solutions.
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