By: Thabani Ndwandwe, chief risk officer at Standard Bank SA

The easing inflationary environment locally and globally has raised the prospect that the South African Reserve Bank may cut interest rates in the third quarter of the year, with Standard Bank forecasting two interest cuts by the end of the year. While the cut in rates, the first time since the outbreak of the pandemic will reduce monthly mortgage commitments, higher administrative and home servicing cost such as rates and taxes will keep clients under pressure.

The upward interest rate cycle started in November 2021, driven largely by the COVID pandemic, local energy issues and volatile food and oil prices. Consumers with a R1,000,000 bond on their homes, would have seen their interest rate repayments increase by almost R4,000 a month today. This is a growth of over 40% in instalments since November 2021.

“Despite rates predicted to edge lower, benefits to customers might take a bit longer to filter through. Since November 2021, the price of electricity has increased by an average of almost 30%, or 23% above inflation. This added more pressure on households struggling to balance household finances,” Thabani Ndwandwe, chief risk officer at Standard Bank SA, which has the biggest home loan book in the country, said.

The prime lending rate has risen 475 basis points since November 2021 as the economy began recovering from the pandemic.

Standard Bank forecasts the central bank will cut its benchmark interest rates twice by the end of the year with the first cut of 25 basis points expected in September. The bank expects a further two cuts in the first half of 2025 as inflation, which peaked at 7.8% in July 2022, has cooled to 5.2% in May. The Reserve Bank has a targeted inflation range of between 3% to 6%.

The Reserve Bank’s monetary policy committee, which decides on interest rates every two months, met on 18 July and decided to hold the repo rate steady for the seventh consecutive time.

For a bond worth R1 million, homeowners can expect to save R208 per month, or R2,500 per year on their repayments after a 25-basis points rate cut. If the rate cuts expected in the first half of 2025 shave off another 50-basis points, homeowners could pay R625 less per month for a R1 million property in a year’s time. There is R1.2 trillion mortgages in South Africa and a 50-basis points reduction will free up over R4 billion currently going towards instalments per annum. That’s a R4 billion benefit for consumers.

The relief will go a long way in softening the blow caused by the increase in monthly property servicing costs like rates and taxes. In cities such as Johannesburg electricity tariffs increased by 12.7% on 1 July while property rates increased by 3.8%. Tariffs for refuse collection, water and sanitation have also increased at a pace that has outstripped inflation.

Over and above these increases, City of Johannesburg’s prepaid electricity customers will get an additional R200.00 fixed charge every month.

Even before these increases, South Africa’s property sector was reeling from the increased cost of living. Ooba Home Loans’ latest oobarometer showed that the number of new home loan applications in the first quarter of 2024 was 9% lower than in the first quarter of 2023, and 25% behind the same period in 2022.

“A reduction in interest rate should lead to a recovery home loans application volumes, which had already started rowing by 8% since the last quarter of 2023, however this growth will likely be muted by municipal tariff hikes,” concludes Ndwandwe.