Lesetja Kganyago, governor of the South African Reserve Bank
- An unexpected cut in interest rates could give SA’s battered consumers some breathing space.
- On a R2 million home loan, you will now pay around R300 a month less.
- But if you kept your repayment the same, and don’t accept the cut, you could save up to R150,000 in interest and shorten your home-loan repayment time by up to a year.
- Or you could channel the R300 to a personal loan, which will also make a massive difference.
On Thursday, battered consumers received some unexpectedly good news during the longest financial month of the year.
Most economist didn’t see it coming, but the monetary policy committee was unanimous in its decision to lower rates by 25 basis points.
This was due to grave concerns about the state of SA’s economy, as expressed by central bank governor Lesetja Kganyago.
Thursday’s cut leaves the prime rate at 9.75%.
Unfortunately, on short-term debt, it won’t make much of a difference: On a car loan of R200,000 (for a loan over five years, at the prime rate), you will only save R25 a month. On a R10,000 personal loan (at 21.75% over 24 months) you will save a single rand – the new installment will be R645.
On home loans, however, a rate cut will be noticeable: On the average R2 million home loan at the prime rate, the new rate cut will mean a saving of more than R300 a month. This will go a little way to ease other pressures, especially after festive-season splurging.
But there are two other ways you can make the rate cut work harder:
Keep your home-loan repayments unchanged
If you kept your bond payment unchanged – you will pay off your home earlier and save a massive amount in interest.
Take for example a R2 million home loan. Instead of allowing your monthly installment to go down with the rate cut by about R330, you can keep it unchanged and stick to the current payment.
Over the course of twenty years, this will cut your home loan repayment period by a full year. And you will save more than R150,000 in interest.
It is simple to arrange – just contact your bank to keep your payment at the current level.
Ideally, you should at the same time adjust the term of your home loan to shorten it, otherwise you may have to pay fees and charges even after you have paid off your home loan. A home loan needs to go through a cancellation process with a conveyancor in order for the property to be transferred into your name.
Use your home-loan saving to repay high-interest debt
You could also choose to channel your home-loan rate-cut saving to debt with higher interest rates, particularly credit card and personal loan debts.
On a personal loan of R20,000 over three years, you could pay an interest rate of around 22% (compared to the prime rate, which is now 9.75%).
Over the course of three years, you will pay interest of R7,000 on the R20,000.
But if you channel the extra R330 to your loan repayments – you could end up settling the loan up to a year early, and save up to R2,800 in interest.