28 Mar 2019
The ups and downs of the repo rate – 5 ways it could affect you
A rise or fall in the repo rate can affect your debt repayments, savings and investment – the volatility can even affect your ability to buy a property. We demystify the complexity behind interest and lending rates. Here are our five key insights.
The original article was first published on Ahead of the curve.
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Most of us know that the repo rate is a big deal, but we don’t always know why. The confusion often lies in understanding the difference between the repo rate and the prime lending rate.
Let’s start with the basics. The repo rate, also known as the repurchase rate, is the rate at which the South African Reserve Bank lends money to the banks. The banks, in turn, lend money to their clients.
And the prime lending rate is a rate the banks use as a benchmark for setting interest rates when lending that money. It is marked up or down depending on your risk profile when you apply for a loan. Prime-linked interest rates are also applied to certain savings and investment accounts.
So, how does the Reserve Bank’s repo rate affect a bank’s prime lending rate? More importantly, how does it affect you as a young person when you’re seeking a loan or opening a savings product?
Well, in most cases, you can take out a loan at a fixed interest rate or a prime-linked rate. If you chose a fixed rate, you will experience no impact if the repo rate changes. But, if you have a prime-linked loan, you need to pay attention to changes in the repo rate.
Here’s how the repo rates may affect you in the short and long term.
1. Repo rates affect lending
The Reserve Bank’s main purpose is to stabilise our currency and economy. Often a higher repo rate is used to slow inflation. Money becomes more expensive for banks to borrow, which means your credit becomes more expensive too.
In a high-interest rate environment, you should try to limit your credit. Keep your credit score healthy and only borrow for the things you really need.
2. Repo rates affect property prices
When the repo rate rises, so do property prices. Buying a home or investment property becomes more expensive as you simply don’t have the same buying power.
To offset this, you could think about putting down a higher deposit on a new place or look at buying a more modestly priced property.
If you are willing to wait for interest rates to drop, you can possibly get more value for your money when buying property. If you are lucky enough to be a cash buyer, you can make a huge saving.
3. Repo rates affect your return on savings
The good news is that a higher repo rate, conversely, affects your savings potential. When interest rates rise, so do your returns on savings. Of course, other factors could influence savings.
If rates are higher, you should take advantage of the rise and look at putting some money away in a notice or fixed deposit savings account.
4. Repo rates affect prime-linked loans and savings
If you have a prime-linked lending deal with a bank, your interest rate will decrease if the repo rate decreases.
However, if you have invested in a prime-linked savings account, you can expect lower returns over time.
While a fixed interest rate loan protects you from some risk, you also don’t benefit from a lower repo rate and could miss out on any potential savings. Everyone is different, so your credit should always be a considered choice that matches your lifestyle, career and income.
5. Repo rates can affect your credit profile
If you are over-indebted, an increase in lending rates could make your monthly loan repayments unaffordable.
When taking out a loan, always factor in potential rate changes and adjust your budget accordingly. Investec Private Banking offers our clients an app-based calculator to work out the impact of an interest rate change when taking out vehicle finance or a home loan.
Build in a buffer against rate fluctuations. Never lend to the last cent what you know you can pay back monthly – this will leave you with no breathing space if an interest rate on a loan goes up.
If you feel overwhelmed by debt at any point during the term of a loan, get in touch with your banker.
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