This week Reserve Bank Governor, Lesetja Kanyago’s surprise interest rate has been welcomed with joy by the real estate market.
Governor Kanyago dropped repo rate by 100 basis points, to 4.25% per year. This drop, effectively puts the prime lending rate to 7.75%.
We spoke to Philani Veba a Property Investment expert to unpack this decision for us.
Understanding the impact of the Interest Rate Cut
The past few weeks the South Africa has been battered with bad news, ranging from tumbling of the stocks to the rand continuing on a downtrend. However, this 1% drop in the interest rate allows for more savings, said Mr Veba.
“Right now what South Africa needs is anything that will reduce the financial burden on the consumer. And cutting the interest rate, does just that.”
“Cutting the interest will reduce the annual repayment amount by approximately around 1%. And that is a significant drop.”
Who will benefit from the Interest Rate Cut
“Most home buyers are young people who are in their prime in contributing to the economy. Considering the impact of the COVID-19 pandemic, they certainly need some sort of relief as they plan to navigate their lives post the pandemic.” – added Mr Veba
However, it should be noted that the government will lose revenue because of this decision. But the Government will probably recover all that revenue through tax collection from all the Property Market players, he said.
While this all sounds good, it nevertheless does not change the economic woes faced by South Africa. News24 Columnist Mpumelelo Mkhabela in his recent column said the Government should take heed of Governor Kganyago’s advise to put in place structural adjustments to save the economy.
“The unheeded calls for structural reforms ensured that, when Covid-19 struck, we were in an economically weaker position. We were short on contingency reserves, which are partly the reasons why Mboweni is talking to a number of funders, including the International Monetary Fund.” -Wrote Mkhabela
The effect of the new interest rate on a 20-year bond:
| Bond Amount | Interest savings over 20 years | Monthly Savings |
|---|---|---|
| R 250 000 | R 37 657 | R 157 |
| R 500 000 | R 75 315 | R 314 |
| R 750 000 | R 112 972 | R 471 |
| R 1 000 000 | R 150 629 | R 628 |
| R 1 250 00 | R 188 286 | R 784 |
| R 1 500 000 | R 225 944 | R 942 |
| R 2 000 000 | R 301 258 | R 1 255 |
| R 3 000 000 | R 451 887 | R 1 883 |
What will the impact be on your vehicle installment?
With this expansionary monetary policy in place your bank will decrease interest charged on vehicle finance. The prime rate was 8.75 % before increasing to 7.75 % with a 1 percent point drop. What this means is that the banks will start charging interest from 7.75 % compared to 8.75% charged previously which is 1 percent point higher. Vehicle instalments will decrease depending on which bank you took your vehicle finance from. Note that your credit score has an effect on the interest that banks charge. Your interest may be high because of your credit score