Home Buyers Advisory Blog

It is a great time to buy! But - what happens if interest rates go up?

Posted by Aidan-John Rothman on 19 Mar 2021 12:11:58 PM

By now I am sure that you have heard - interest rates are at their lowest levels in more that 50 years! That means that buying a home is more affordable than it has been for a long time.

Just look at the comparisons in the table below...

For the 4 years before 2020 the Prime interest rate averaged 10.25% - it is now 7% and the impact on the amount you qualify for is BIG!

This means that many people are able to afford to buy a home that meets their needs for the first time.

But, if you are cautious like me, you may be worried about what happens if interest rates go up again. Will you still be able to afford to make your monthly instalments?

I recently bought a new home myself and before I did I did some research about this…

What I found was that economists generally believe that interest rates will remain low for some time due to the weak state of the economy and because inflation is expected to stay within the South African Reserve Bank’s target range of 3% to 6%.

For example, Trading Economics estimates the Prime Interest Rate in South Africa to be at 7.5% in 12 months time and for it to trend around 7.5% in 2022 according to their econometric models.

So, to check if I could afford to deal with an increase in interest rates I calculated what my instalment would increase to if interest rates increased to 0.5% and just to be a bit more careful I also checked the new instalment if rates increased by 1.0%. I have shown these calculations below.

In the end, I felt I would be able to manage a small increase in the instalment relative to the advantage of being able to buy a home I loved with the extra affordability because of low interest rates.

I hope this information allows you to check what works for you.

Topics: Bond calculators, Affordability, Home Loan, Buying a home