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Prepare your budget for rate hike

Durban - Consumers battling to climb out of debt will need to prepare themselves for more challenges when the monetary policy committee (MPC) meets later this month, according to Gary Palmer, CEO of Paragon Lending Solutions.

While Reserve Bank governor Gill Marcus left the repo rate unchanged at 5.5% on March 27, she warned that medium-term increases should be expected.

“All that consumers can do is prepare for rate hikes in advance, to ensure that they don’t encounter any financial setbacks and budgetary challenges,” Palmer cautions.

“The focus for all consumers should be to bring down their level of debt and these increases won’t help that goal.”

Prepare for the worst-case scenario

Palmer advised consumers to look carefully at their current household budget to ensure they have taken into consideration the possibility of increases to home loans, vehicle and asset repayments.

“Consumers should examine the possibility of no salary increase, of increases to municipal rates and other factors caused by the increase in the interest rate, as well as other factors,” he told Fin24.

Book a meeting with your bank, lender or financial adviser to get assistance in drawing up a household budget that takes into consideration these factors. What might become evident is that a default is a possibility.

Palmer advises consumers to communicate this concern to their bank immediately. “There is nothing worse for a lender than a client who does not communicate,” said Palmer. “Open communication is key so lenders can assist in finding solutions ahead of any foreseeable problems.”

Planning is key

Planning is key to ensure panic is avoided at the announcement of an interest rate increase, explains Nicholas Nkosi, head of Standard Bank Personal Vehicle and Asset Finance.

“Stress- test your cash flow, with not only the new interest rate applicable but also allow for a further increase,” he said. “Then have a plan of action to deal with the increased costs.”

“Plan your purchase, and consider if the item is a luxury or a necessity,” Nkosi told Fin24. “Know what your expenses are and focus on reducing these.

"If you foresee possible financial stress resulting from interest rate increases, remember to approach your financial institution sooner to discuss options rather than when you have missed a payment.”

Consumers request and obtain finance not considering changes in interest rate, explains Nkosi. “This should always be factored in when applying for debt to ensure minimal impact is experienced should there be such a change,” he said.    
                                                                                                                  
“One of the ways to achieve this would be in paying more on your debt than contracted as this will ease the pressure of the rate hike due to a consumer being already used to paying the higher instalment.”  



Selling property 

Home owners have been hit hard by an increase in municipal rates, which have almost doubled over five years, according to Palmer.

Consumers with more than one property might find the tenants battling to keep up with rent, while rates increase. A budget review might therefore reveal selling property as an option. In that case, Palmer advises consumers to sell property before it becomes too late.

Planning the hikes into your budget could result in the sale of property to offset the stress of further increases in loan repayments. “The key to property is to sell when you want to sell not when another party wants you to sell,” he said.

“Should a bank require you to sell you property, there is a strong possibility that you will obtain less for the property than should the property be sold in a timely manner with no distress.”

Buying an asset

When buying an asset, consumers should ensure they can afford the finance currently and into the future, and make sure the finance offering as well as the vehicle itself meets their needs.
 
“The best way to prepare for the rate hike loom - especially where you are already in an unfavourable financial position - is to cut back on things you can do without,” said Nkosi.

“One can also consider things like lift clubs when travelling to a common place and planning the routes one uses when travelling.

“It also helps to speak to your financial institution.”

Nkosi gives these tips to consumers in the likely event of interest rate hikes this year:

• Save and cut back on things you can do without.
• Find efficient routes.
• Use rewards benefits like the Standard Bank UCount to pay for your fuel and get money back on your purchases.
• When you foresee difficulty in your finances, approach the bank for assistance and do not wait till you are in arrears.  

- Fin24

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