The South African Reserve Bank (SARB) this week increased the repo rate by 25 basis points. This means that the rate at which the SARB lends to your bank has risen from 5.75 percent to six percent. But it does not necessarily mean that you will pay only a quarter-of-a-percent more for credit. The increase will depend on the type of credit agreement and whether you are paying at prime or prime plus a percent.
With some types of credit, the interest you pay is determined by your risk profile. This is the case with home loans, vehicle finance, credit cards and overdraft facilities.
Assuming your risk profile is very good and you pay interest at the prime rate on your home loan, your rate will increase by a quarter-of-a-percent, from 9.25 percent to 9.5 percent.
But if your risk profile is not good, and you are paying the maximum interest rate that the National Credit Act (NCA) allows on a home loan, your rate will go from 25.35 percent to 25.9 percent. This is an increase of more than a quarter-of-a-percent, but that’s the effect of the formula that is used to calculate the maximum interest rates under the NCA.
The formula that is used to calculate the maximum interest on a home loan is: repo rate multiplied by 2.2, plus five percent: in other words, (9.5 x 2.2) + 5 = 25.9.
(Refer to the table – link at the end of this article – for how the repo rate increase will affect different types of credit agreements.)
If you have bought your car on an instalment sale agreement, this is defined as a “credit facility” in terms of the NCA. Overdrafts, credit cards and store cards also fall into this category. The maximum interest rate on credit facilities has increased from 22.65 percent a year to 23.2 percent.
If you have a personal loan (an unsecured credit agreement) and you are charged the maximum rate under the NCA, your rate will increase from 32.65 percent a year to 33.2 percent.
The change in the repo rate will not affect consumers with micro loans (a loan of less than R8 000 payable over six months) and incidental credit agreements (such as an overdue medical bill or school fees).
The maximum interest you can be charged on a micro loan is five percent a month. And the maximum you can be charged on an incidental credit agreement is two percent a month.