No repo rate respite yet – consumers paying almost 40% more on loans now than in 2020

Consumers are now probably paying almost 40% more on their loans than they did in 2020, which makes a major difference to consumers whose income did not keep pace with inflation and interest rates.

If you took out a R1 million home loan in 2020, your premium is likely to have gone up by close to 40% in just four years, which shows how important it is to factor in repo rate swings when applying for credit.

With economists now forecasting no repo rate cuts until the third quarter of this year, it is important to know what this means for new and existing debt, Ayanda Ndimande, business development manager of retail credit at Sanlam, says.

“Debt on variable interest does not have a fixed interest rate. Premiums change according to the repo rate, the rate that the South African Reserve Bank (Sarb) charges commercial banks. Based on this, banks then charge a prime rate to their clients. If banks pay more, their clients pay a higher prime rate too.”

ALSO READ: Repo rate remains unchanged again at 8.25%

Consumers paying significantly higher interest

The repo rate has been sitting at an almost 15-year high since May 2023, with more delays to the cutting cycle now forecast until later this year. Ndimande says this means that people may be paying significantly higher premiums now than they were in 2020.

This table shows how the repo rate influences how much we pay now for our debt compared to 2020:

	2020	2024
Loan amount	R1 000 000	R1 000 000
Interest	7.25	11.75
Deposit	0	0
Term	20 yrs	20 yrs
Premium	R7 904	R10 837
Full payment	R1 896 902	R2 600 897

If you now pay over 36% more on your monthly premiums than in 2020, it has a knock-on effect on your monthly budget. Ndimande says that it is crucial to factor the repo rate into your affordability calculations when you consider your credit options.

“Stay within your affordability range, ensure you have a good credit score to qualify for cheaper interest and make a deposit to reduce the balance when possible. Once you secured credit in the current environment it is wise to pay in more when you can, with the aim to pay off a loan as quickly as possible.”

Ndimande urges South Africans to do a budgeting exercise before applying for credit to understand the opportunity cost that comes with it.

“Draw up a budget including the upper limit of the credit you consider applying for. Can you afford that monthly premium within your current budget? What sacrifices will you have to make? Are you willing to make these compromises? It is important to ask these questions before you take out any loan.”

ALSO READ: This is what you can expect from interest rates in 2024

Economists expect no repo rate cut this week

All 23 economists who participated in a Reuters poll expect the Sarb to keep its repo rate steady at 8.25% on Wednesday and wait until the third quarter to start cutting. A small majority predicted no change in May compared to a 25 basis point cut.

Jee-A van der Linde, senior economist at Oxford Economics Africa, says they expect a gradual and possibly shallow cutting cycle for the repo rate. “We forecast that the Sarb will implement the first 25 basis points cut in September, followed by another one in November.

“With South African monetary policy still deemed restrictive, authorities are mindful of the increasing economic hardship consumers face but also alive to the heightened risk of capital outflows”.

He also points out that the Sarb does not have the luxury to implement early rate cuts and that much will depend on the future actions of major advanced economy central banks. “The Sarb noted again in January that it still sees serious upside risks to inflation. Consequently, it will want clear evidence that inflation is sustainably reverting to the midpoint of the target band (3%-6%) before it considers lowering interest rates.”

ALSO READ: MPC’s decision to keep repo rate unchanged no surprise – economists

Sarb at end of hiking cycle, but no repo rate cuts yet

Nicky Weimar, Johannes Khosa, Liandra da Silva, Crystal Huntley and Isaac Matshego, the economists at the Nedbank Group Economic Unit, say the Sarb has reached the end of its hiking cycle.

“Our assessments show an ongoing easing in domestic as well as global price pressures and the focus is firmly on when the Sarb will likely start its cutting cycle. Domestic inflation is forecast to remain within the Sarb’s target range throughout the year and edge closer to the midpoint toward the end of 2024.”

In addition, they say, while the upside risks to the inflation outlook are a concern, they have eased moderately since the last policy meeting and remain driven by exogenous and supply-side pressures while demand-side risks continue to subside.

“Credit conditions have moderated from their previous highs, debt service costs have increased significantly and consumers are finding it increasingly difficult to meet their debt obligations.

These consumer dynamics suggest that policy rates are restrictive enough, a fact that the Sarb itself has reiterated several times.”

ALSO READ: What does higher than expected inflation increase mean for repo rate?

Sarb expected to start cutting rates in July

They say their base case scenario is for the Sarb to keep rates unchanged at its March and May meetings and for a cumulative cut of 75 basis points throughout 2024, with an initial reduction of 25 basis points at the July meeting.

“Based on our forecast, the repo rate will stand at 7.50% and the prime lending rate at 11% by the end of this year. While the cuts in the repo rate will provide much-needed financial reprieve, interest rates will remain restrictive, trending about 125 basis points above the pre-pandemic levels of January 2020.”

The more sustained slowdown in inflation could justify more aggressive cuts, they say but point out that the scope for this will likely be limited by expectations for global interest rates to remain higher for longer and South Africa’s elevated risk premium.

Elize Kruger, an independent economists, also says the repo rate is likely to remain unchanged at this week’s Monetary Policy Committee (MPC) meeting as sticky headline inflation, the weakness in the rand exchange rate and concerns about food prices could keep the SARB from providing early relief.