Further interest rate cut likely

Further interest rate cut likely

And it will help lower household debt.

The South African residential property marketing sector will benefit “perhaps far more than most people realise” from a further 0,5% drop in the interest rates – and I expect this to come after the next Monetary Policy Committee meeting.

What is more, on the figures now being discussed by SA’s economists, right now is very definitely the right time to introduce a further rate cut.

The average South African’s debt to income ratio has improved, but it is still too high – I would like to see it at 60%. With bond repayments now amounting to 25% to 30% of SA’s monthly serviced debt, a lower interest rate could also lower the debt to income levels.

The lesson of the last four years’ global economic problems is that keeping the debt levels of its citizens manageable should be a top priority goal for any government operating in a free market environment.

The timeous introduction of the National Credit Act and the responsible way the banks have implemented it have saved South Africa from the unhealthy over-borrowed positions of so many Americans and Europeans.

However, once debt is at acceptable levels (as it is in SA), loan finance is absolutely essential to achieve growth. Many people in the home marketing sector are inclined to think that the banks are not really distinguishing between responsible lending and excessive risk aversion. Almost every loan, of course, carries some risk but in a well managed financial system this can be kept at low levels, while still making a healthy contribution to growth through loan finance.

If, as seems likely, the 0,5% rate drop is approved at the next MPC meeting, bondholders should try hard not to take advantage of this but to maintain their current level of repayments, if possible also paying in an extra month’s repayments once or twice a year.

We have shown time and again how paying slightly above the minimal rate reduces your debt repayment period by years. At Rawsons we have many clients who, adopting this approach, pay off their loans in 10 to 15 years – that is the way to go. Homebuyers must be discouraged from increasing their debt simply because, with a lower interest, loans will be less expensive and, possibly, slightly easier to obtain.

I and others expect a further 0,5% drop in the rates after the one he is now predicting and this could happen before Christmas.

I foresees rates rising again, my “guesstimate” puts that in the third quarter of 2012 and, he says, he anticipates rates rising steadily from then on.

I must again advise those who are now enjoying the low rate scenario to take the long view and pay off as much as they can each month now, thereby making their financial position more manageable when rates do rise.

*Tony Clarke is the MD of Rawson Properties.

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Denny Crane

Denny Crane
It's not me ... yet. Denny Crane from the TV series Boston Legal. Click on picture if you're not sure who he is!