After holding steady at a 15-year high for seven consecutive meetings, it’s likely that the Monetary Policy Committee’s meeting on 19 September will bring good news about a rate cut. The repo rate – the rate at which the South African Reserve Bank lends money to private banks – is currently at 8.25%. The prime lending rate, which is the amount banks charge customers, is 11.75%. Given that inflation has subsided in recent months, experts predict a 25 basis point drop.
With this in mind, Bradd Bendall, National Head of Sales for BetterBond, considers five ways life will change if the repo rate drops:
- Your credit score could improve. When the repo rate is hiked, usually to slow inflation, commercial banks increase their interest rates. This means that the cost of borrowing money increases. Conversely, when the repo drops, the cost of borrowing decreases and it becomes easier to meet your loan obligations. This, in turn, will have a positive impact on your credit score. A lower prime lending rate means you can borrow more from the bank, giving you better buying power.
- Lower interest rates will make buying a home more affordable to more buyers. With more buyers in the market, and demand outweighing supply, we could see house prices start to increase.
- A lower interest rate will reduce your monthly bond repayments. On a R2m bond, a 25 basis point cut to take the prime lending rate from 11.75% to 11.5% will reduce the monthly bond repayments by R345 from R21 674 to R21 329. Bendall suggests, however, keeping your bond repayment at the same level if you can afford it. By paying more into your home loan, you will save on interest and other administrative costs and shave time off the loan repayment period.
- The interest payable on your bond each month will be less which means that you will end up paying less for your home over the full loan repayment period. Again, using a R2m bond as an example, a 25 basis point cut in the prime lending rate will reduce the overall loan amount over 20 years by almost R83 000.
- You will also pay less on your car repayments and other loans. Although interest rates on car financing vary between financial institutions, they are calculated based on the prime lending rate.
- A drop in the prime lending rate will unfortunately have an impact on your savings. If you have a prime-linked savings account, the return on your savings will drop. However, a fixed deposit savings account will mitigate the impact of interest rate fluctuations.
Regardless of the interest rate, consumers should always budget prudently and consider affordability when applying for a bond or any other loan, advises Bendall. “Pay a deposit on your bond if you can afford it and try to maintain your monthly bond repayments at a higher level than the current interest rate to save on long-term interest.” Make the most of the financial reprieve afforded by a lower interest rate to top up your credit cards and service high-interest loans.
Writer: Aithne Molotsane
