HOW TO TAKE ADVANTAGE OF THE INTEREST RATE CUT

PUBLISHED 28 APR 2018   

HOW TO TAKE ADVANTAGE OF THE INTEREST RATE CUT

It’s been a month since the interest rate cut was announced by the Monetary Policy Committee (MPC) at their second meeting for the year on 28 March, but what does it all mean for you?

Reserve Bank Governo, Lesetja Kganyago, announced that the interest rates would be cut by 25 basis points. In laymen’s terms, this means that the repo rate (the rate at which the Reserve Bank lends money to commercial banks) will be lowered to 6.5% and the prime lending rate to consumers will be lowered to 10% (this means that the interest rate on items such as your bond and other debts will be lowered).

To make the most of this situation, try to view this as an opportunity to save for future investments. Then again, you can also choose to reroute the money you’re saving straight back into your bond repayments and cut up to a full year off of your lending term.

Lower your monthly repayments
The monthly repayment on a R1 million bond with no deposit, calculated at the new interest rate over 20 years amounts to R9,650. Based on the previous interest rate, the monthly repayment for the same bond amounted to R9,816. This totals a saving of R166 per month on bond repayments. If you choose to channel this money right back into your monthly bond repayment, you can potentially cut a whole year off of your lending term depending on how far along you are in the lifespan of your bond.

Shorten your lending term
If you are right at the beginning of your 20 year lending period, it is possible to shorten your lending term by up to 12 months. But, if you are halfway through your 20 year bond, you will only be able to cut about two months off the lending term. The power of compound interest is largely to thank for this. When stretched over 20 years, this small R166 per month (plus the interest it accumulates) turns into 12 months’ worth of bond repayments. However, the amount saved when limited to just the second half of your bond lifespan, amounts to only two months’ worth of repayments. Still, two months off your total repayments amounts to a saving of close on R20,000.

Save on overall price
First-time buyers can also save by purchasing property now. Before the interest rate cut, a R1 million house would have ended up costing R2,355,944 at the end of the 20 year loan period. At the current interest rate, the same house will end up costing R2,315,664 at the end of a 20 year period. If you purchase property at the current interest rate, you are saving R40,280.

Final Thoughts
The way we see it, you have the choice between two options: either enjoy the short-term pleasure of having an extra R166 to spend each month, or invest that money in a way that results in long-term financial relief.