Most credit-stressed South Africans feel the pinch of interest rates

South Africa

The South African Reserve Bank’s (SARB) recent benchmark repo rate hike  raised more alarm bells for the most credit-stressed South Africans, according consulting firm Eighty20. The Cape Town-based consumer strategy and research company’s latest figures point to Middle-Class Workers –a segment made up of about 4.1 million adults typically earning between R8 000 and R30 000 a month– feeling the most financial strain as money has never been tighter.

For middle-class workers in South Africa, the average instalment-to-income ratio has increased by nearly 9% over the past year. As a result, about two-thirds (66%) of the average middle class salary just goes towards servicing their loans. “Almost 75% of this segment is credit active, 30% of which have home loans and one-third of car loans in South Africa, this market segment will feel the pinch with even the smallest hike,” said the research firm.

The SARB raised its benchmark repo rate by 25 bps to 7.25% at its January 2023 meeting, while markets had expected a 50 bps increase. It was the 8th consecutive rate hike since November 2021.

The latest hike brings the prime lending rate to 10.75%, the highest it has been since 2009, Eighty20 said. If someone took advantage of the lowest interest rate period in 2021 and purchased an R1.5 million home, they would have seen their monthly instalments increase by nearly R3,400 in just over a year, according to the firm.

“It is unlikely that their salary would have grown by 28% over the same period. This is the reality facing 2.2 million people with a home loan in South Africa,” Eighty20 said.

Meanwhile, looking at the numbers for the middle class for this quarter, home loans in default went up by nearly 19%, according to Andrew Fulton, Director at Eighty20 Consulting.

South Africa’s average inflation expectations for 2023 increased to 6.1% in the fourth quarter from 5.9% previously.