Seven tips to help you deal with rising interest rates

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Cash-strapped consumers really need to know how to deal with rising interest rates, after the South African Reserve Bank again increased the repo rate with 75 basis points and warned that this will not be the last hike, considering the inflation rate shows no sign of moving back into the bank’s inflation band of 3 to 6%.

This increase brings the prime lending rate to 10.5% as the repo rate has increased by 3% so far this year. To demonstrate how aggressive the hikes have been over the past year, Maarten Ackerman, chief economist at Citadel, uses property as an example.

“If you fully bonded a new home for R3-million to pay over 20 years you would have paid R23 711 per month in November 2021. One year later, with the interest rate of 9.75% in November 2022, you would pay R28 456 per month for the same house.”

That is an increase of approximately R5 000 from your monthly disposable income in under a year, and Ackerman says further rate hikes expected down the line will only increase this pain for consumers.

Do not panic about interest rates

However, Lee Hancox, head of channel and segment marketing at Sanlam and a certified financial planner, says whatever you do, do not panic.

“Take a step back and consider your options and most of all start talking about money.”

Hancox says absorbing a further 75 basis points, even for those who do not have a large amount of debt, has a significant impact on your disposable income.

“It is a big jump. Those of us who might have had a bit of breathing room in our budget a year ago, may not have that anymore.”

She says now is the time to stay calm.

“Take a step back and consider where you can cut things from your budget to try and take some of the pressure off. Zero-based budgeting is particularly helpful as you start your budget from scratch and re-evaluate every item.”

Proper planning and making small changes can make a big difference and Hancox shares these tips:

  • Revisit your financial goals, write them down and decide what to prioritise. A financial adviser can play a critical role in helping you manage your finances.
  • It is more important than ever to draw up a budget and stick to it. Remember to factor in those day-to-day expenses that add up.
  • Plan a proper grocery shop instead of buying a few items here and there. Also be strict on non-essential items.
  • Your bank statement is a good place to spot overspending. Are there any unused subscriptions? Can you cut back on the number of times you eat out or get takeaways?
  • One thing the Covid-19 pandemic taught us was the importance of having an emergency fund, with savings that you can use for unforeseen expenses you cannot budget for, such as if your car breaks down.
  • Pay your bills on time every month. If you pay a bill late you may have a late payment penalty or you may start accumulating interest on overdue amounts.
  • Do not be tempted to cancel or decrease your retirement savings or life cover contributions. This is a big decision with long-term consequences and therefore you should discuss it with your financial adviser.

Neil Roets, CEO of DebtRescue, says the latest steep increase was certainly influenced by the rise in consumer price inflation to 7.6% in October and this is bad news for consumers who had to absorb a relentless onslaught of living cost increases this year and who now, by all accounts, are in for an even rougher ride in 2023.

Bleak picture for indebted consumers

“This rate hike paints a bleak picture for South Africans who are paying off debt on property, vehicles and credit cards.

“Consumers have felt the brunt of all of these increases on their pockets throughout the year and struggle financially. Many are not making ends meet and had to make so many adjustments already to their living expenses, that there is nowhere left to cut.”

Global economic prospects also do not look good and Roets says there is no good news for South Africans either.

“The reality is that people have reached the end of their rope and cannot absorb more living cost hikes, whether it is electricity, petrol or food. The latest interest rate hike may well be the straw that breaks the camel’s back.”

People had to contend with relentless interest rate hikes this year that pushed up their debt instalments on the one side of their budget and their cost of living in the form of food, transport and electricity, increased on the other.

“With the festive season now just around the corner, this will lead to more South Africans relying on their credit and store cards to put food on the table and enjoy some kind of festive celebration. “The likelihood is that they will default on debt and fall into a hole they cannot easily climb out of.”

Ina Opperman/The Citizen