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Rate cut may hurt debt levels

Jul 19 2012 17:08 Sapa

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Johannesburg - The SA Reserve Bank's interest rate cut on Thursday may negatively affect debt levels, said First National Bank Home Loans strategist John Loos.

"I'm a little concerned that further rate cutting may lead to a premature end to (the) declining trend in the debt-to-disposable income ratio," Loos said in a statement.

Although the debt-to-disposable income ratio had been declining, its current level of 74.7% was still too high, he said.

Earlier, the Reserve Bank announced it had cut the repo rate by 50 basis points to five percent.

The prime rate would decline to 8.5%.

Loos was surprised by the decision as he had expected a cut only in September.

"Should we go into another fairly normal... magnitude of interest rate hiking cycle, I believe that the still-high level of indebtedness would quickly manifest itself in a considerable degree of financial pain for the household/consumer sector, and for the residential property market," he said.

FNB home loans head of sales Ewald Kellerman encouraged consumers to use the rate cut to reduce their debt and increase their savings.

Home buyers should bear in mind that the interest rate was very low, and take into account that it could increase.

They should therefore only take on a home loan well within their means to be able to absorb future interest rate hikes.

"Secondly, costs related to housing such as municipal rates and tariffs are escalating at rates significantly higher than consumer price inflation," Kellerman said.
sarb  |  john loos  |  interest rates  |  sa economy  |  debt
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