Homeloan defaults expected to spike due to hiked interest rates

30 January 2014

Over the past few weeks, the weakening rand has threatened implications on inflation rates and need for interest rates to be raised faster and at a higher rate than expected. Gill Marcus, Reserve Bank Governer, has increased the repo rate to 5.5%, as a means of keeping foreign investors interested in the country.

Ian Wason, the CEO of DebtBusters, South Africa’s largest debt counsellor, warns on troubled times ahead for home loan providers “The increase of just 0.5% will have a massive impact on consumers with home loans. Not only are these consumers already faced with price hikes in electricity, rates and petrol, but many of them are overloaded with unsecured debt as well. This may be the final straw for many of them, and I would expect to see a large spike in defaults on the banks home loan books in the month ahead.”

Ian Wason was more upbeat on the impact on clients with only ‘unsecured’ debt, “with almost 1 in 2 credit active consumers already having impaired credit records, these consumers are in so much trouble financially that a half a percent hike isn’t going to make a difference. On average, DebtBusters clients are already spending more than 100% of their income servicing their debt, excluding living expenses. If you are paying 60% interest plus massive fees and credit life insurance to a credit provider for a short term loan, what difference is an extra half a percent going to make! Also, the majority of personal loans are on fixed interest rates anyway.”

Higher interest rates will slow consumer spending growth in South Africa. Consumers living in already difficult economic times are going to be subjected to a rise in the cost of living, consequently lowering their disposable income and increasing their debt repayments.

“I completely understand Gill Marcus’ rational for increasing rates, but it is horrific news for the over indebted consumer, and we expect to see the number of clients with home loans applying for debt counselling rocket. DebtBusters has seen an 85% year on year increase in the amount of debt counselling applications they have received and are expecting 2014 to be an even busier year,” says Wason.

Summary:

  • “Expect a massive spike in home loan defaults from South Africa’s 2 million home loan clients.”
  • “On average, DebtBusters clients are already spending more than 100% of their income servicing their debt, excluding living expenses, a big increase on 2013.”
  • However, consumers with unsecured debt will be relatively ‘unaffected’. With many consumers paying 60% interest, plus fees and exorbitant credit life insurers on their short-term loans, what difference is an extra half a percent going to make?
  • Almost 1 in 2 credit active consumers has impaired credit records meaning that these consumers have missed 3 or more monthly payments or have an adverse listing, judgement or administration order. As a country, we are already stuffed with debt, but this may be the final straw for many. 

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