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What Every South African Property Investor Needs to Know About Interest Rate Hikes

In South Africa, interest rate hikes have become a topic of great interest to property investors. To better understand the current market conditions and help investors make informed decisions, we spoke with Christiaan Jansen, a financial specialist and franchisee at threesixty finance – Menlyn. Jansen provided insights into how recent interest rate hikes have impacted the South African property market, particularly in terms of investment properties and refinancing.

Impact of Interest Rate Hikes on the South African Property Market

According to Jansen, interest rate hikes have significantly affected the South African property market. Previously, with low prime rates, new entrants were able to qualify for a R1m bond on a gross salary of R26 000 per month. However, the recent rate hikes mean that R1m now requires a gross salary of R34 000 per month. This has a knock-on effect on the ability to keep up with payments, especially since the bond instalment on such a property has gone up from R7 750 to R10 150 per month.

Impact of Interest Rate Hikes on Investment Properties

Jansen pointed out that there was a decline in favorable investment grade stock, since many tenants became first-time homeowners, and every prospective homeowner primarily focuses on buying with an emotional connotation (owning a nest, ownership at all costs). This pushed up prices, especially for high-demand properties. As investors focused on buying below market value, negotiating for a better price became a cumbersome task. However, Jansen expects great deals to start coming up within the next six months as budgets settle with the hiked rates.

Comparison of Current Interest Rate Hikes with Previous Hikes

The market is cyclical in nature and has certain trending characteristics. The progressive increases that have been observed in the past, according to Jansen, are likely to continue at this high level for a time before abruptly declining. "Consider the hiking trends from 1998 through 2008 and the present. It is not brand-new "Jansen remarks. Who can and wants to enter the market is somewhat impacted by changes in ownership. The old adage "Willing buyer plus willing seller equals a successful transaction," as he puts it, applies here.

Impact of Refinancing on the South African Property Market

When interest rates fell, a number of investors refinance their homes, freeing up a lot of money. Yet, the increased rates make bonds less affordable, therefore there may be fewer refinancing applications as a result of diminished bond qualifying. Since there is no room for additional financing if you are at your maximum capacity, this will also affect people who have financed themselves to the point of qualification. As a result, they will effectively be shut out of the market for a while, at least until their income increases or the interest rates decrease.

Refinancing vs Re-advance

Jansen explained that refinancing and re-advance differ in that refinancing requires the registration of a second bond at the deeds office, while re-advance does not require another bond registration, as it is an internal function at the bank since the bond has already been registered.

According to Jansen, the simplest way to demonstrate this is by using a real estate transaction as an example. Let's say you spend R500 000 on a property. You submit a bond application for R500 000, the full purchase price. You can choose between two options: Bond can be registered at R500 000 or up to R750 000, or 150% of the acquisition price. Let's go ahead a few years, to a time when the property is now worth R750 000. Here, the distinction is shown with an increase in the bond to R750 000:

  • Refinancing – Further Advance application – increase the bond to R750 000 and register an additional bond of R250 000

  • Re-advance – Re-advance application – increase the bond to R750 000 without bond registration, since it has already been done

However, the re-advance option is not always the best option, as it can be deemed as exposure without access to the funds that can prevent additional property purchases.

Tips for Savvy Investors

For investors looking to enter the South African property market despite the recent interest rate hikes, Jansen provides some insight and tips. He advises that when purchasing a property, the reduced purchase price for equity and cashflow from rental income or profit from reselling after refurbishment must make sense. Remember that good deals exist in all markets. Your departure strategy—rental or sale—is crucial. Prepare for both to hedge your bet and keep your deal appraisal sober.

Jansen further suggests that savvy investors use the BRRR approach: Buy, Renovate, Refinance, Rent. As the property increases in value and generates cash flow, that cash flow can assist in paying off the higher bond, which is then used for additional purchases. However, investors must not over-extend themselves to the point of being caught out by rising interest rates and the inability to pay their obligations. To assist in navigating the process of obtaining property finance through banks in the current market conditions, investors can turn to financial specialists, who can assess their ability to secure financing, facilitate financing applications at the banks, and plan for future purchases.

Are you ready to take your real estate investing to the next level? Don't let the recent interest rate hikes discourage you. With the right strategy and guidance, you can still find great opportunities in the South African property market.

Book a call with one of our expert consultants at investRand today to learn more about how you can navigate the current market conditions and achieve your investment goals. Our team of specialists can assess your financial situation, help you secure financing, and provide advice on the best investment strategies for your unique circumstances.

Don't miss out on the chance to build wealth through real estate. Book a call with us now and let's explore the possibilities together.

Disclaimer : None of the information contained here constitutes an offer (or solicitation of an offer) to make any investment, or to participate in any particular investment strategy. investRand does not take into account of your personal investment objectives, specific investment goals, specific needs or financial situation and makes no representation and assumes no liability to the accuracy or completeness of the information provided here.

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