[Rek jou cheque] Repo-ing min rewards: Rate cut relief, but debt and living costs keep many on edge
Last week, South African Reserve Bank (SARB) Governor Lesetja Kganyago announced that the central bank will cut the repo rate by 25 basis points, meaning rates will drop by 0.25%.
This means that the repo rate will decrease from 8% to 7.75%, while the prime lending rate decreases from 11.50% to 11.25%.
I remain unimpressed by how financial institutions and even financial media continue to issue statements that don’t mean anything to the masses who don’t understand financial jargon.
So, for clarity, allow me to answer some commonly asked questions about this.
Question: What is the repo rate we keep hearing about in the media?
Answer: This is the rate at which the South African Reserve Bank lends money to private banks
Question: What is the prime lending rate banks are constantly referring to?
Answer: It is the minimum interest rate at which a commercial bank is willing to lend. This will be the repo rate PLUS what banks charge to make a profit.
Question: How does an increase in the repo rate affect ordinary consumers?
Answer: When the repo rate goes up, the interest charged on your credit goes up, too. So, your monthly repayments on debts such as your home loan, vehicle finance, personal loans, store accounts, and credit cards all increase and decrease according to the fluctuation of the repo rate.
Question: Which is higher, the prime lending rate or the repo rate?
Answer: The prime lending rate will always be higher than the repo rate, as banks lend at a slightly higher rate to cover their basic profit margin.
While everyone is seemingly happy about the interest rate cut, some feel it might be too little.
Neil Roets, the CEO of Debt Rescue, says that irrespective of the economic factors, ordinary mense continue to bear the brunt of the highest interest rates the country has experienced in over a decade.
He explains: “Along with relentless increases in living costs, a rapidly escalating water scarcity crisis, and a seasonal drought that could seriously impact food crop quantities as we head into the festive season, ordinary South Africans continue to bear the brunt of the highest interest rates the country has experienced in over a decade”
“While [the decrease in the repo rate] is a step in the right direction, it should come as no surprise that this small drop in borrowing costs will make no discernible difference in the lives of millions of struggling households across the country.
“It will certainly not put food on the table of millions of needy families.
“While I understand that global factors like conflict contribute to escalating food prices, there are factors like the repo rate and food price monitoring that, when managed, can relieve the confluence of pressures on consumers.
“Much more urgent action is needed, especially from the major retailers who benefit from high food prices”
Roets warns that a growing number of people are resorting to shortterm loans and credit facilities to get through the month, trapping them in a vicious debt cycle that is not easy to break.
Meanwhile, Antonie Goosen, the principal and founder of Meridian Realty, sees the rate cut as a positive step for both consumers and the property market.
Goosen adds: “Rate reduction offers much-needed relief to South Africans struggling with their monthly repayments.
“Homeowners with bonds linked to the prime lending rate will see slightly-reduced repayments. The rate cut also creates fresh opportunities for buyers.
“Lower borrowing costs make homeownership more accessible and might be the incentive that first-time buyers need.
“Sellers could benefit from increased demand if their properties are well-priced and ready for sale.”
A 25 basis-point reduction means a monthly savings of R171 on a R1 million bond and R344 on a R2 million bond.
The average South African home is priced at R1.46 million, which generally means a decrease of R250/m on the instalment, and right now, every little bit helps.
Though further rate cuts are expected in 2025, I think it is important for South Africans to remain cautious.
The turbulence experienced globally will undoubtedly impact our economy as well.
I suggest that if you can afford it, continue paying your current monthly installment to your creditors.
Maintaining higher monthly payments can reduce your loan term and save significantly on interest costs over time.
dailyvoice@inl.co.za