You should avoid taking out unsecured loans to fund consumption spending over the festive season, because the increase in the repurchase (repo) rate will exacerbate the negative impact on your finances, Rayanne Jacobson, the chief executive of Izwe Loans, says.
The South African Reserve Bank this week increased the repo rate (the rate at which the central bank lends money to banks) by 0.25 percentage points to 6.25 percent. The cumulative increase since the bank started to raise the repo rate in January 2014 is 1.25 percentage points.
The prime lending rate, which is the interest rate banks charge their clients, increased to 9.75 percent. However, the rate at which many South Africans borrow money is significantly higher, particularly if they have an unsecured loan.
The rate increase will not affect existing fixed-rate unsecured loans, because only loans taken out after the interest rate hike will be priced higher.
Jacobson says the interest rate for an unsecured loan is calculated at a multiple of 2.2 times the repo rate with an added margin.
However, floating-rate debt, which applies to home loans, vehicle finance, credit cards and overdrafts, are linked to the prime rate.
“Consumers may not feel it immediately, but the combined effect of festive-season spending and the floating rate coming up may hit them hard in the new year,” Jacobson says.
The rate hike means that the repayments on a home loan of R1 million over 20 years will increase by R166.22 a month to R9 816.43 from R9 650.22, assuming that an interest rate of 10 percent increases to 10.25 percent. The repayments on a R250 000 car over five years will increase by R30.80 a month to R5 342.57 from R5 311.76.
But taking into account the rate increases since January 2014 using the same baseline (the interest rate increasing from 10 percent to 11.25 percent), consumers are now paying R842.34 more a month on their home loan repayments and R155.07 more on their cars than they were in January 2014.
Jacobson says you should curb consumption spending and pay down your most expensive debt first. You should also contribute more to your monthly repayments, which will reduce the term of the loan and save you interest.
Jeanette Marais, the director of distribution and client service at Allan Gray, says that higher interest rates on money market or bank deposits will not necessarily protect your capital over the long term, because your investments have to grow by more than the inflation rate each year for you to achieve a real return.
Marais says equities (shares) are the only asset class that has out-performed inflation significantly over the long term. However, this potential for higher returns comes with the increased risk of capital loss, as well as increased short-term volatility.
If you are saving for the long term, you may be better able to tolerate volatility and thus benefit from equity exposure over time, Marais says.
Investors who sell their investments during a period of short-term under-performance often miss out on a substantial part of the return that results when markets recover, Marais says. You should rethink your investment strategy only if there is a change in your personal circumstances or your ability to tolerate risk, not because of short-term fluctuations in performance.
Marais says the most prudent option for most investors is to hand the asset allocation decisions over to an experienced investment manager by investing in a multi-asset, or balanced, unit trust fund. With these unit trusts, the managers adjust the allocation to the different asset classes (equities, bonds, cash and property) in response to their assessment of where the best opportunities lie.