How the Reserve Bank's interest rate decision affects you and your home loan

Ahead of the South African Reserve Bank's Monetary Policy Committee's interest rate decision on March 20, we take a closer look at the effect of interest rates on home loans.

Impact of interest rates on home loans

According to Samuel Seeff, chairman, Seeff Property Group, interest rates have an enormous impact on home loans, including the demand for home loans as well as the availability of home financing to boost the property market.

"If interest rates increase, there is typically a drop in home loan applications and property sales, as the cost of home loans and other debts rises

This makes it less affordable for potential buyers and more difficult for existing homeowners to maintain their repayments.

"For example, during the 2008 Global Financial Crisis when the economies of the work went into a slump and interest rates rose drastically, homeowners suddenly found themselves in difficulty, job losses, lack of pay hikes etc., for example all impacted there ability to pay their home loans, hence there was a notable rise in “distressed” properties, i.e. where the home owners could no longer afford their houses," Seeff said. 

Conversely, when the interest rate decreases, it makes home loans and property, consequently, more affordable. There is usually an uptick in demand for property and home loan applications.

Interest rates are, therefore, a vital indicator for the economy as well as the property market.

"The economy also suffers tremendously when interest rates rise because households have to pay more on their debt, hence, they have less disposable income available to spend on houses and in the economy," Seeff said. 

"Seeff therefore feels very strongly that interest rates must also be linked to the economic needs of the country."

Home loan repayments

Debt such as home loans along with cars, store accounts, and credit cards are all linked to the interest rate, with payments going up or down as the interest rate varies.

"Thus, if there is an increase in the interest rate, repayments adjust upwards to accommodate the increase. If there is a reduction in the interest rate, payments are adjusted downwards," Seeff said. 

These changes have a direct impact on consumers, homeowners, and homebuyers.

If the interest rate goes up, they have less to spend on their home loan repayment, and in the economy.

If the interest rate goes down, it is usually good for the property market, home loans industry, and the economy because consumers have more to spend on houses, home loans, and other goods and services.

After four years, South Africa has just experienced an interest rate cutting cycle where the interest rate dropped from 8.25% to 8% in September 2024 to 7.5% in January 2025. 

This means that the prime lending rate decreased from 11.5% in September 2024 to 11% in January 2025.

Using these figures as well as the average cost of a property in South Africa, here is a look at the total monthly repayment on a home loan from the start of the interest rate cutting cycle to the most recent interest rate announcement (January 2025). 

Interest rates predictions for March 2025

Despite the marginal increase in inflation to 3.2%, it remains near the bottom of the Sarb’s target range of 3%-6%.

This means that South Africans have reason to expect that the Sarb will provide more relief to consumers, homeowners, and potential buyers at the next March meeting. 

"While the Reserve Bank has indicated that there may potentially be two more rate cuts of 25bps each, Seeff remains of the firm view that it is not enough, especially since inflation has dropped so low."

"This is the ideal time for the Bank to step in and provide a more meaningful cut of at least 50bps to provide a real boost to the economy and property market. Seeff believes that the biggest risk in the country right now is not inflation, but economic stagnation and rising unemployment. A lower interest rate along with vital reforms, are critical to address this."

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