Two thirds of salaries sucked up by debt

The 'pandemic period' property market is booming, three out of four residential property sales have been supported with a mortgage agreement. True story for banks and mortgage originators.

The full story told is that cash buyers have crashed out of the market, meaning the overall volume of residential property sales are at their lowest levels since 1992.

Mortgages are the cheapest form of credit and interest rates are at their lowest in 67 years. Half of all consumer debt is allocated to mortgages. The total home loan book is valued at R1.1 tr (according to the Reserve Bank’s August data). Great news for the 1.6 m consumers who are building wealth through property funded by a mortgage loan. Thanks to the National Credit Act, interest rates are capped at 15.5% per year (equal to the repo rate plus 12 percentage points). The true cost of credit is built in the long-term nature of a home loan over 240 months.

Credit facilities - our garage cards, credit cards and store cards, are the most popular form of credit. Collectively, 24.4 m active credit facilities have access to R264 bn. And if you settle your account in full in each month, the cost of credit is zero. The reality is that making only the minimum payments is the norm, and even then 25% of facilities are behind on this minimum payment commitment. NCA Regulations limit interest to a maximum of 17.5% per year (or equal to the repo rate plus 14 percentage points).

Funders are willing to finance vehicles either by way of a secured loan, or for cars less than R300 000, unsecured loans are on offer. This is where credit starts to become expensive, secured credit tops out at 20.5% per year and unsecured credit 24.5%. Factor in longer loan periods of up to 99 months and balloon payments which entice immediate gratification of “more vehicle for less monthly repayments” and the overall cost of finance starts to become seriously expensive.

As consumers, we have been programmed to budget based on the monthly cost we can afford, without considering the effect of longer loan periods and the cost of the credit rate, which impacts the total monetary repayments over the full term.

Payday loans or short-term credit is uncomfortably expensive. As the name suggests, these loans have a maximum six-month term and are small in value (less than R8 000). Interest rates are quoted per month, a whopping 5% per month, convert that to 60% per year.

Other factors which impact the overall cost of credit include the initiation fee, the monthly admin fee and credit insurance. Always request a full break down of these additional charges to budget the full monthly commitment.

Household debt to disposable income edged lower to 66.7% in the second quarter of 2021, consumers are spending two thirds of their salary to service their debt. Improving this ratio relies on either increasing income or managing debt more effectively.

Interest rates are forecast to slowly start increasing if current debt levels maintain status quo. But with higher forecast interest rates, the impact of debt repayment simply consumes more salary. The solution is a tighter budget. Consumer's control over the impact of rising interest rates can and should be mitigated with proactive steps to rebalance personal budgets. Steps include shifting expensive credit agreements - move short term, unsecured credit to less expensive options, and shop around at different credit providers to review the best rates. And if your budget allows, increase payments to pay down the debt quicker prior to the inevitable interest rate hikes.

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