Interest rates hike expected to spike home loan defaults

‘ Higher interest rates will slow

consumer spending growth in

South Africa

HOME loan defaults are expected to spike due to last week’s announcement of hiked interest rates.

This is according to DebtBusters chief executive Ian Wason, who expects a massive spike in home loan defaults from South Africa’s two million home loan clients.

“On average, DebtBusters clients are already spending more than 100% of their income servicing their debt, excluding their living expenses,” Wason said.

Over the past few weeks, the weakening rand has threatened implications on inflation rates and the need for interest rates to be raised faster and at a higher rate than expected.

Reserve Bank Governor Gill Marcus has increased the repo rate to 5.5%, as a means of keeping foreign investors interested in the country. Wason warned 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 al- ready 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.”

Wason was more upbeat on the impact on clients with only “unsecured” debt, “with almost one in two credit active consumers already having impaired credit records, these consumers are in so much trouble financially that a 0.5% hike is not 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% inter- est 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?” Wason asked.

“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’s 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,” Wason said.