The Monetary Policy Committee (MPC) of the South African Reserve Bank unanimously voted to cut interest rates in July. This will reduce the repo rate by 0.25% to 6.5%. The repo rate is the rate at which banks borrow from the Reserve Bank. The decision by the Reserve Bank to reduce the repo rate will serve to try and stimulate the stagnating economy. It is not a huge move in the grand scheme of things as it is merely undoing the 0.25% increase to the repo rate the SARB decided on in November 2018.
It does however provide an excellent opportunity for consumers to get themselves out of debt sooner by leaving monthly repayments fixed.
A reduced interest rate would lower your repayment on your home loan, but keeping it as it was will save you time and loads of money on interest. The trade-off will be between instant cash flow or long term saving. Paying your home or car off earlier will open up additional cash flow, which can be used to supplement your retirement savings.
Scenario before the interest rate cut.
- R1 mil home loan at a 10.25% interest rate over 20 years.
- Repayment of R9816 pm.
- Total repayment = R2 355 944
After the interest rate cut.
If you keep the repayment at R9816pm with the new interest rate of 10%, you will save a total of one year on the bond term making it 19 years and close to R80 000 in interest. Higher bond amounts will equate to higher interest savings
These types of decisions made by the SARB always has an effect on your personal finances and may create opportunities for the consumer. Just by keeping your repayments as it were, might save you a lot of money. Always speak to a professional before making financial decisions.
Ruvan J Grobler