The South African Reserve Bank cut interest rates for the first time since March 2018 last Thursday, lowering rates by 25 basis points to 6.5%. This cut has led to banks cutting their prime lending rates from 10.25% to 10%. While this 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.
Let’s use John and Shirley as an example. The couple has a home loan of R2 million to be repaid over a 20-year period. At 10.25% interest per annum, their monthly repayment was R19 632.86. With the recent rate cut, their monthly repayment reduces to R19 300.43 per month. The couple decide to leave their repayment at R19 632.86 per month, and the result is that their bond term will reduce from 20 year to 19 years. In doing this, the couple will manage to make total interest savings of R161 010 and gets themselves out of debt a year sooner.
If their interest rate was at prime plus 2%, their savings would jump to R249 461.83 (or R108 648.77 in today’s terms). If John and Shirly had 15 years left on their home loan, by keeping their repayments at the previous level they would reduce the term of their bond by six months by saving R65 098 in interest and R115 802.58 in repayments. If the couple had 10 years left on their bond, they would reduce the term by 2.5 months, saving R17 707392 in interest and R48 251. 08 in repayments.
Remember to 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. 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.
In summary, consumers are encouraged to take advantage of this 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 being able to channel the additional cashflow towards building sustainable wealth. Saving is habit-forming, and this interest rate cut provides an excellent opportunity for all consumer to establish disciplined saving habits.
