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Understanding Interest Rates

Last month, the South African Reserve Bank cut interest rates by 100 basis points. What does this mean for you as a borrower? And how does it impact your savings?

Last month, the South African Reserve Bank cut interest rates by 100 basis points. What does this mean for you as a borrower? And how does it impact your savings? 

Here’s everything you need to know about interest rates; how they work, and how they affect your savings and debt.

There are two kinds of interest rates: the repo rate and the prime rate. The repo rate is the rate at which the South African Reserve Bank lends money to the banks. The prime interest rate is the benchmark that banks use to price the risk of lending. The prime rate is linked to the repo rate, so if the repo rate drops, so does the prime rate. 

What’s the current repo rate?

The repo rate has been reduced from 6.5% to 4.25% this year so far. 

“Prime” is the benchmark rate for a customer with a good credit record. A bank will price above or below that, depending on the underlying risk posed by the specific customer, the type of loan, as well as the current risk appetite of the bank.

So, although the prime rate is the same across all banks, banks still compete on the interest rates they charge a specific customer. The prime interest rate is linked to the repo rate and is currently 3.5 percentage points above the repo rate, at 7.75%. 

However, this does not mean that you will be paying only 7.75% interest on your debt. “Prime” is the benchmark interest rate for consumers in good standing. If you pose a greater “risk” to the credit provider, your interest rate may be much higher than prime – but not more than is stipulated by the National Credit Act. For example, the NCA stipulates a personal loan cannot have an interest rate higher than 21 percentage points above the repo rate (25.25%), a credit card maximum is 14 percentage points above the repo rate (18.25%) and the maximum for a home loan is 12 percentage points above the repo rate (16.25%). Loans of up to six months have a set maximum rate of 5% a month.

Variable and fixed interest rates

If you have a loan with a variable interest rate, your debt instalments will be impacted by a rise or fall in the repo rate, since this impacts the prime interest rate. If you opted for a fixed interest rate for the period of your loan, your instalment will remain the same despite a change in the repo rate. 

Unfortunately, a cut in the repo rate also impacts the amount of interest you earn from your deposits at the bank. However, banks may compete for deposits by offering attractive deposit rates, so you can shop around to get the best offer. 

If you are struggling to make ends meet because your loans have a fixed instalment, please get in touch with us. We will advise you on the best way to take charge of your financial wellbeing.