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What does the July repo rate increase mean for you?
Debt could cost you more, but your investments could earn more too.
In 2020 the South African Reserve Bank (SARB) decided to decrease the repo rate drastically to an astonishing all-time low of 3.5%. This was to help ease the knock-on effect that the Covid-19 pandemic was having on the economy as intermittent lockdowns hammered businesses and tourism.
The repo rate is the rate at which SARB lends money to commercial banks like Nedbank. It is linked to the prime interest rate – the base rate used by banks when lending money to clients. So, a change in the repo rate will affect anyone who owes money on a home loan, personal loan or credit card and is charged a variable interest rate.
That’s a distinction to remember whenever you sign a contract for a credit product. If you opt for a fixed interest rate, it will probably be higher than the initial variable interest rate offered on the same loan. But that fixed interest rate never changes over the loan period – you pay the same amount every month, no matter what happens to the repo rate. A variable interest rate changes as the repo rate changes, so while a loan might start off cheaper at a variable interest rate, that benefit could disappear rapidly if the repo rate rises sharply.
The latest repo rate hike explained
On Thursday, 21 July 2022, South Africa saw the biggest repo rate increase in almost 2 decades: 75 basis points, or 0.75%, bringing the rate to a whopping 5.5% and the prime lending rate to 9%. This latest hike was prompted by consumer inflation reaching 7.4%, which is the highest it’s been in more than a decade.
After the May 2022 increase in the repo rate by 50 basis points, following 2 hikes in November 2021 and January 2022 of 25 basis points each, inflation continues to pressure consumers with rising food and fuel prices. The current situation is largely a result of the continuing Russian invasion of Ukraine, which is likely to last throughout the year and have significant effects on global prices. According to Lesetja Kganyago, governor of SARB, ‘Inflation continues to surprise to the upside.’
What this means for your debt
Variable interest rates on your home loan, vehicle finance or any other debts will increase. If you owe R2 million on a home loan at a prime interest rate of 9%, for example, your monthly payments will increase by about R950 a month.
The repo rate hike at least has a silver lining for those who have planned and invested wisely
A higher repo rate could make it harder for you to manage your payments every month, so you might need to reassess your monthly budget. Even if you can afford your new debt payments with surplus money to spare, there’s no guarantee that interest rates won’t rise again if inflation remains unchecked. Now is the time to save and invest any extra money to help you survive any future shocks, rather than taking on more debt.
What this means for your savings and investments
The repo rate increase means a higher return on investments and savings, so it can help you meet your medium- and long-term savings goals. Now is a good time to add more money to your savings, or to start a tax-free investment and take advantage of the better interest rates. You could also add more money to your retirement annuity and get better returns to enjoy in your golden years.
What this means for your spending
You might want to reconsider big life-changing purchases like buying a home, because property prices tend to increase as the repo rate rises. You won’t have the same buying power as you did previously because a home loan is going to cost you more in interest. You may have to adjust your ambitions to find an affordable home that suits your needs.
The rising interest rates are also a reminder that it makes sense to pay more than the minimum every month on any debts you have, if you can afford to. Paying more than the amount due helps you reduce the capital balance owed faster, and since the interest is calculated on the remaining capital balance every month, you pay less interest in total. This strategy is particularly helpful for large, long-term debts like home loans.
What this means if you’re already retired
This repo rate increase is a bonus for those who are dependent on savings or living annuities. A higher repo rate means higher interest rates on these investments, giving you higher returns. So, although it’s bad news for debtors, the repo rate hike at least has a silver lining for those who have planned and invested wisely.
Make better money choices while the repo rate is high and start building wealth. Nedbank offers you a range of investment and savings plans to suit your medium- and long-term financial goals.
This information is intended for general information purposes only and does not constitute financial advice.
