How to make the most of the repo rate cut

Desperate and over-indebted South Africans could at last breathe a sigh of relief on Thursday when the Reserve Bank cut the repo rate by 25 basis points.

This repo rate cut will put a little more money in consumers’ pockets and give South Africans a chance to increase their savings and strengthen their personal finances, Subash Chatrooghoon, an accredited financial adviser at Liberty, says.

Economists also indicate that a further cut in the prime lending rate could occur before the end of 2024, further boosting consumers’ disposable income or ability to save.

“The prime lending rate was reduced to 7% during the Covid-19 pandemic to assist South Africans facing financial hardship. In November 2021, the Reserve Bank started to increase the repo rate, with the prime lending rate peaking at 11.75% in May 2023 and remaining there since.

“The impact on personal incomes has been severe. But, with inflation easing and falling within the Reserve Bank’s target range, consumers have an opportunity to use the ‘rebate ’in the repo rate wisely instead of resuming to spend.”

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How the repo rate cut can save you money

Chatrooghoon points out that for someone with a bond with a balance of R1 million (payable over 30 years) and currently paying 11.75 % interest, the bond repayment is R10 094 a month. A drop of 0.25% means this monthly payment will decrease to R9 712, saving R382 a month.

Reductions in interest on short-term debt such as credit cards, car loans and bank loans will also increase the cash available for household budgets, he says.

“The reduced mortgage costs offer the most significant opportunity for saving money. Keeping the monthly payment at R10 094 rather than pocketing the R382 will reduce the repayment time of a R1 million bond to just over 23 years. Significant savings on interest payments will also accrue.”

By doing nothing and letting current monthly repayments remain at their pre-reduction levels, consumers will save across all types of debt.

Chatrooghoon says other ways to make the prime rate work to your benefit include using the opportunity to begin reducing debt. The key is to stop spending, closing unnecessary accounts and using the newly available cash to pay off debt faster.

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Lower repo rate: consider consolidating your debt

Also, consolidating debt with the lower rate in force could be considered, he says. This would lower the rate charged for the consolidated debt and drop the interest costs of the individual debts in the consolidated ‘basket’. The savings could be considerable, he says.

“Looking further, if you make financial plans covering short- and long-term goals, you could benefit from consulting a personal financial adviser. Considering factors like the interest rate exemption of R23 800 per year and the tax deductions available for retirement savings could be factored into savings and retirement plans.

“Extra cash paid into a retirement annuity will attract a greater rebate from Sars, creating a ‘win-win’ situation by saving for your golden years.”

One of the strategies often considered is opting for a fixed interest rate rather than a variable interest rate, but Chatrooghoon says what you choose depends on your financial goals, risk tolerance and the economic climate.

“A variable interest rate changes periodically based on the repo rate, meaning that payments or returns change as the interest rate changes. In a low-interest environment, variable rates might be lower than fixed rates, saving money if the rates drop. However, if rates increase, payments do the same.

“With a fixed interest rate, the rate remains the same throughout a loan or investment term. Payments are, therefore, clearly defined, making budgeting and financial planning easier. However, fixed rates might be higher than the current variable rates and if rates drop further, there are no benefits.”

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Repo rate cut offers opportunity for new approach to your finances

Perhaps the greatest opportunity a prime rate cut offers is to use savings to launch a new approach to your personal finances. Chatrooghoon says this includes not buying expensive items like cars, appliances, or electronics on credit and buying what you need rather than what you want.

Boosting your emergency funds by aiming to have three to six months’ worth of living expenses saved for emergencies such as unexpected medical bills, unemployment, or emergency car repairs can also provide peace of mind.

“As with all financial planning, the sooner you start, the greater the benefits. Rather than regarding this week’s rate cut as a windfall, restricting personal spending and awaiting further prime rate cuts could reduce financial pressures,” Chatrooghoon says.