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The Repo Rate Explained: How Do Interest-Rate Cuts Affect You?

What is the repo rate? Simply put, it’s the rate at which the Reserve Bank lends money to South Africa’s commercial banks. It’s adjusted to keep inflation within a target range of 3-6% and on 23 July 2020, the South African Reserve Bank took 25 basis points off its repo rate. This brought it to 3.5%, a full 300 basis points below where it started in 2020 (and a four-decade record low). This also pushed the prime commercial lending rate to 7%. 

Now, you may be asking yourself, as the Reserve Bank takes these unprecedented monetary policy steps to help mitigate the economic fallout of the COVID-19 pandemic, what exactly will this mean for YOUR finances? 

How Can Repo Rate Drops Help You?

When the repo rate goes up, commercial banks and other lenders increase their interest rates. As a knock-on effect, the cost of borrowing money increases for customers and consumers just like you. This means, unless you have a fixed interest rate, you’ll be paying more on your loans. In theory, when it drops, the opposite is true and you could be paying less on your loans. 

For example, this repo rate cut of 300 basis points since the start of the year, effectively means that homeowners with a R1 million existing 20-year home loan will be saving around ±R1 900 a month in bond payments. 

How to Start Optimising for Some Financial Relief 

With the above in mind, and while this might be a tempting time to spend your extra disposable income, this money can be carefully used to secure your future financial success. Here are 4 pointers on how to optimise for financial relief right now: 

  • Stay on top of your credit profile – sign up to DirectAxis Pulse for FREE and you can check your credit score rating as often as you like. This will help you to find out where you may need to improve your portfolio, while interest rates on your debt are lower. This is also helpful when you’re applying for any other kind of credit – from a home loan to vehicle finance – as your risk profile will determine how attractive you are to creditors. A good credit score rating means lower interest rates on the credit you may take out. 
  • Pay off your debt faster – if you do have a lot of debt to deal with at the moment, this is a good time to consider getting what is known as a consolidation loan. This can help you get rid of all outstanding debt while these rates are at their lowest in South Africa. Once these rates begin to climb again, the window may be gone to lower your debt in general. 
  • Target your higher interest-rate credit first – when you’re combing through your credit portfolio, categorise your debt from the highest to lowest interest rates. Then target bigger payments towards eliminating the former as quickly as you can, without missing payments on anything else. If you don’t have additional income to put towards this, simply continue to repay your loans as per usual. Don’t reduce amounts just because interest rates have dropped and your mandatory monthly payments seem lower on paper.  
  • Start saving for emergencies – one of the most difficult things to do in 2020, and possibly moving into 2021, will be to save money for the future. Try to get to a place where you’re paying off your debt as fast as possible while also having at least three month’s expenses put away for emergencies. This will also help you break the habit of creating more unnecessary future debt.

Taking Control of Your Finances 

As a team of financial experts who value responsible lending and highly respect South Africa’s business and financial markets, we know how important it is to ensure that you understand the impact these economic shifts have on your financial wellness. We hope the above tips are useful in providing this peace of mind and can assist you in achieving greater control over your financial portfolio. 

  • DirectAxis
    Stats

  • 24%

    Consolidation

    of customers use loans for consolidation

  • 24%

    Renovations

    of customers use loans for renovations

  • 12%

    Education

    of customers use loans for education