Latest interest rate cut fuels South Africa's pool of qualified buyers

The 1% reduction in interest rates announced today by the South African Reserve Bank will provide a much needed boost to the local property market by further increasing the pool of qualified buyers and offering more affordable mortgage repayments for existing homeowners. This is according to Jonathan Novick, Managing Director of Vered Estates, one South Africa’s premier estate agencies.

“Various factors have had an effect on South Africa’s diminishing pool of qualified buyers, starting with the introduction of the National Credit Act in 2007. This was then compounded by a consistent pattern of rising interest rates and the beginning of the credit crunch, whereby banks tightened up on their lending criteria. These factors all combined to make it more difficult for home buyers, particularly first-time home buyers to qualify for a home loan.

“The prime interest rate has now decreased from its height of 15.5% in June 2008 to 11%, equating to a drop of 29%. This has steadily increased the pool of qualified buyers for any given price category, which is essential for the continued stimulation of our property market. For example, based on a generic calculation, twelve months ago, when interest rates were at 15.5%, a potential buyer with a gross income of R30 000 and monthly expenses (including salary deductions, living expenses and other credit repayments) of 20 000 could probably qualify for a home loan of around R665 000. At the current interest rate the same buyer would probably qualify for a loan of around R870 000. This means there are more possible buyers for any given property.

Novick adds that the 4.5% interest rate reduction over the last year has also reduced the monthly mortgage repayments significantly for existing homeowners. For example, the monthly payment on a R1 000 000 home loan now amounts to R10 321. This is R3 217 less than the R13 538 monthly payment required in June last year when the prime rate stood at 15.5%, and R689 less than was due before today’s cut.