MAIN IMAGE: Bradd Bendall – BetterBond national head of sales
Advertorial
After holding steady at a 15-year high for seven consecutive meetings, the Monetary Policy Committee’s meeting on 19 September brought with it a long-awaited interest rate cut. The repo rate – the rate at which the South African Reserve Bank lends money to private banks – is now at 8%. The prime lending rate, which is the amount banks charge customers, is now 11.50%.
With this in mind, Bradd Bendall, national head of sales for BetterBond, considers six ways life will change for homeowners as a result of the drop in the repo rate:
1. Their credit score could improve
When the repo rate is hiked, usually to slow inflation, commercial banks increase their interest rates. This means that the cost of borrowing money increases. Conversely, when the repo rate drops, the cost of borrowing decreases, and it becomes easier for clients to meet loan obligations. This, in turn, will have a positive impact on their credit scores. A lower prime lending rate means they can borrow more from the bank, giving them better buying power.
2. Lower interest rates make buying a home more affordable to more buyers
It’s important to remember that with more buyers in the market and demand outweighing supply, we could see house prices start to increase.
3. A lower interest rate reduces monthly bond repayments
On a R2 million bond, with a prime lending rate of 11.5%, reduces the monthly bond repayments by R345 from R21 674 to R21 329. Bendall suggests, however, advising clients to keep their bond repayments at the same level if they can afford it. By paying more into their home loan, they will save on interest and other administrative costs and shave time off their loan repayment period.
4. Homeowners will pay less for their homes
The interest payable on their bond each month reduces which means that homeowners will end up paying less for their homes over the full loan repayment period. Again, using a R2 million bond as an example, a 25 basis point cut in the prime lending rate reduces the overall loan amount over 20 years by almost R83 000.
5. Consumers pay less on their car repayments and other loans
Although interest rates on car financing vary between financial institutions, they are calculated based on the prime lending rate, which will save consumers more money.
6. The lower prime lending rate will unfortunately have an impact on savings
If clients have a prime-linked savings account, the return on their savings will drop. However, a fixed-deposit savings account will mitigate the impact of interest rate fluctuations.
Regardless of the interest rate, consumers should always budget prudently and consider affordability when applying for a bond or any other loan, advises Bendall. “If they pay a deposit on their bond and try to maintain their monthly bond repayments at a higher level than the new interest rate, they will save on long-term interest.” Now is the time for clients to make the most of the financial reprieve afforded by a lower interest rate. They can do this by diligently topping up their credit cards and servicing high-interest loans.