Deur Anja van den Berg
On 18 June the South African Reserve Bank cut the interest rate for the first time since March 2018, lowering the rate by 25 basis points to 6,5%. This cut has led to banks cutting their prime lending rate from 10,25% to 10%.
“The repo rate is the rate at which banks can borrow money from the Reserve Bank,” Clive Eggers, Head of Investments at GTC, explains. “Why does that matter? Because that ultimately has an impact on the interest rate that banks charge people when people want to borrow money.”
Any debt should benefit from an interest-rate cut, with a fixed interest rate as the only exception.
By lowering the interest rate, the Reserve Bank is effectively lowering the cost of borrowed money, Eggers continues.
As far as the man on the street is concerned, this allows them to keep their heads above water in terms of paying their debts, Eggers adds. However, he cautions against running up unnecessary debts or lowering monthly repayments.
Gareth Collier, a director and shareholder at Crue Invest (Pty) Ltd, agrees.
“While the interest rate drop will result in lower monthly home loan and vehicle repayments for South African consumers, it provides an excellent opportunity for consumers to get themselves out of debt sooner by leaving monthly repayments fixed.”
Collier encourages consumers to take advantage of the rate cut by keeping their home loan and vehicle repayments unchanged.
“By resisting the temptation to lower your monthly repayments, you will reap the rewards of paying off your debts sooner and be able to channel the additional cash flow towards building sustainable wealth,” Collier adds.
Check if your home loan has an access facility. An access facility allows any additional contributions towards your home loan to remain accessible in the account and can be used if and when the need for emergency funds arises in the future.
“While an access bond is one of the best places to keep your savings, it can be the trickiest to commit to,” Collier cautions. “This is because when we save, we expect to see our rand balance grow as and when we earn interest each month. However, when saving in an access facility, the growth in your money comes from the interest you are not paying on your loan account.”
In other words, you will be in a better financial position by not paying 10% interest on your home loan than by earning interest of approximately 7% in a savings account.
Saving is habit-forming, and the interest rate cut provides an excellent opportunity for all consumers to establish disciplined saving habits.
Business Day: https://www.businesslive.co.za/bd/economy/2019-07-18-reserve-bank-cuts-repo-rate-by-25bps-to-65/
East Coast Radio: https://www.ecr.co.za/lifestyle/family/expert-advice-how-benefit-most-repo-rate-cut/