What does the lower interest rate mean? This is how you can benefit
The South African Reserve Bank has cut the repo rate from 4.25% to 3.75%, meaning the prime lending rate will fall to 7.25%. What does this mean for the ordinary South African?
JustMoney demystifies the financial jargon and explains how lower interest rates could impact your life.
The Reserve Bank is generally very conservative and its Monetary Policy Committee does not cut rates easily. However, the impact of the Covid-19 pandemic has flattened almost every sector of the economy and battered many wages, salaries, and profits. The rates cut is intended to help support the economy, companies, and cash-strapped citizens.
The repo rate is the standard interest rate at which the Reserve Bank lends money to other banks. The impact cascades down as these banks, in turn, adjust the interest rates they charge for lending money ‒ also the interest they pay out on savings and money market accounts.
If you are living off your savings ‒ possibly because you have lost your job due to the lockdown, or are a pensioner ‒ then the rate cut is not positive news. You will receive less interest on your savings, unless you invested at a fixed interest rate. When you sign up for a new savings package, you will probably be offered a slightly lower interest rate and will consequently earn slightly less.
However, if you are paying off debt and are already cash-strapped, then the lower interest rate will be welcome if you have a loan with a variable interest rate. You will pay a slightly lower amount monthly. The lower interest rates will also help if you are about to take out a new loan.
“Bear in mind that a loan consists of two parts: the principal debt amount, and then the interest charged over the period of the loan,” says JustMoney Commercial Manager Sarah Nicholson.
“With South African interest rates at a near 50-year low, it makes sense to maintain or even increase the amount you pay back on a loan every month if you can possibly afford to do so. This way, you will reduce the term of your bond, for example, and end up paying less interest overall.”
In the process, you should build up a good credit score. This indicates the likelihood of you paying your monthly instalments, based on your financial history. If you achieve this good track record you are more likely to be offered a good interest rate if you take out another loan ‒ or be approved for a home loan.
If you are considering buying your own home, it could make sense to shop around now. Many stock levels are high, prices are under pressure, and banks are competing for business. You could find that a seller may be more amenable to a lower offer, or you could try for a home in an attractive neighbourhood that was previously out of your reach.