How to take advantage of the low interest rates

Oct 31, 2024 11:38:33 AM

"If you already have a home loan, now is the time to consider a strategic approach to your repayments. You may choose to pay your previous, higher amounts on your bonds despite the decrease in required monthly payments."

How to take advantage of the low interest rates

By Jessie Taylor

With the South African Reserve Bank lowering the repo rate by 25 basis points, bringing it to 8%, and the prime rate now standing at 11.50%, many South Africans are looking at the potential benefits this could bring.

The decision to lower the repo rate follows a global trend of more accommodative monetary policies, with the US Federal Reserve also cutting rates. While this move may seem small to some, its impact on loans, bonds, and savings could be significant, depending on how South Africans decide to leverage the changes.

The repo rate and its impact

The repo rate, or repurchase rate, is the rate at which the central bank lends money to commercial banks. When the South African Reserve Bank (SARB) adjusts this rate, it directly influences the interest rates consumers pay on loans. The bank uses this tool primarily to manage inflation, keeping it within a target range of 3% to 6%. Lowering the repo rate is a way to encourage economic activity by making borrowing cheaper for both consumers and businesses.

The cut comes after a period of rising interest rates that began in 2021. Homeowners, car buyers, and businesses alike have seen the cost of servicing their loans increase dramatically in recent years. The recent cut provides an opportunity to reassess financial strategies, particularly when it comes to managing debt.

The immediate beneficiaries of a lower repo rate are borrowers. Home loans, car loans, and personal loans tied to the prime lending rate will see a reduction in interest payments. For example, on a new R2 million home loan at the prime rate, borrowers can expect their monthly payments to decrease by about R350. Though this might not seem like a large amount, it can add up over time, providing relief to those who have been financially strained by rising rates.

Reserve Bank Governor Lesetja Kganyago noted that inflation is cooling, with the rate dropping to 4.4% in August—a three-year low. The outlook suggests inflation will remain below 4.5% through 2026, offering further confidence that rates could stabilize or even decrease further in the medium term.

For those considering taking on new debt, now might be the time to do so.

The impact on homeowners and first-time buyers

If you already have a home loan, now is the time to consider a strategic approach to your repayments. You may choose to pay your previous, higher amounts on your bonds despite the decrease in required monthly payments. Doing so could significantly reduce the total interest paid over the loan’s lifespan, potentially shortening the loan term by several years.

Lower interest rates not only reduce monthly bond repayments for existing homeowners but also make homeownership more accessible for first-time buyers. Affordability has been a significant barrier for many South Africans, particularly as rates climbed over the past few years. With this rate cut, more individuals could qualify for home loans, increasing activity in the property market, especially in the lower to middle price ranges.

For first-time buyers, now could be an ideal moment to enter the market, locking in more affordable rates while property prices are still relatively low.

While borrowers benefit from lower rates, savers could face reduced returns. As interest rates decline, so do the interest rates offered on savings accounts and other low-risk investments. This could deter some from saving, especially when inflation-adjusted returns are considered.

The drop presents an opportunity to diversify your financial portfolio. Consider shifting savings into higher-yielding investment vehicles, such as equities or property, which could provide better returns in a lower interest rate environment. For those with shorter-term savings goals, fixed deposits may still offer a relatively stable return, but it’s worth exploring other options to maximize growth.

With borrowing costs set to remain lower for the foreseeable future, real estate investment becomes a more attractive proposition. Lower monthly bond payments free up cash flow, allowing investors to manage properties more effectively and potentially expand their portfolios. Moreover, as property prices are expected to rise due to increased competition in the market, early investments could see strong returns in the coming years.

If the current rate-cutting cycle continues, experts predict that the residential property market will transition from a buyer’s market to a more balanced environment within the next two years. This shift could reignite growth in the property sector, with increased activity driving up demand and, eventually, property prices.

The real benefit lies not just in the rate cut itself but in the broader economic indicators, such as decreasing petrol prices and slowing food inflation. These factors combined will increase disposable income for South Africans, potentially spurring a more robust housing market.