This time last week, on 16 September 2010, Reserve Bank Governor Gill Marcus announced that the central bank’s Monetary Policy Committee had decided to cut the repo rate by 50 basis points, leaving it at 6%.
As a result, the interest rate is at its lowest level since 1979. To put the benefits of this into effect, the four big banks announced that interest on mortgages will be decreased by 0.5% (from 10.0% to 9.5%) with effect from 10 September 2010.
This cut signals a drop of around R500 per R1 million of a bond which is great news for those of you that are trying to pay off your home loans. It will also benefit anyone looking to enter the property market for the first time, as it will be easier to get a home loan. For example, the monthly earnings required to qualify for a R500 000 loan at 9.5% will be R15 500, compared to the R16 100 required at the previous prime rate of 10%.
The 50 basis point decrease also has a positive impact on vehicle repayments. For example if you are paying off a vehicle loan of R100 000 over five years you can expect to pay R300 less in premiums per annum, which works out at R25 less per month.
These small monthly savings add up to give you a fair amount of extra disposable income over time. To really benefit from the rate cut you should use this surplus to pay off debt and debt service costs, and also make sure that all of your assets are properly insured. Once you’re confident that you’re making your way out of the red, you should adjust your debt repayments to pay off your remaining short-term debt as quickly as possible and avoid using your savings to supplement your daily expenses. Implementing this strategy will stand you in good stead when interest rates pick up again.
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