On Thursday, 28 January 2016, the South African Reserve Bank’s Monetary Policy Committee decided to increase the interest rate (repo rate) by 50 basis points to 6.75%. Since January 2014, lending rates have increased 175 basis points to the 10.25% prime lending rate that we have now.
Wow, that sounds like something we copied from an economics textbook.
What does this all mean and, more importantly, how does it affect our budgets? Let’s start by defining the most important buzzwords:
What are basis points?
A basis point is a unit of measurement that is used mainly for interest rates and bonds. One basis point is 0.01% (or 1/100th of a percent). Thus, 25 basis points equal 0.25%.
For example: The interest rate used to be 6.25%. When the Reserve Bank increased it with 50 basis points, it changed to 6.75%.
What is interest?
Interest is the cost of lending money. It is worked out as a percentage on the total loan amount.
For example: If you borrow R100 at an interest rate of 10%, it means you will have to pay back R100 plus 10% of R100, which makes your total repayment R110.
What is the difference between repo rates and prime rates?
In short, the repo rate is the interest at which the Reserve Bank lends money to other banks in the country – now 6.75%.
When these banks then lend money to businesses and consumers, they use the prime rate as a basis to determine the interest they charge those borrowing from them. The prime rate is usually reserved for the banks’ “best” customers, or those with the smallest risk, and it is always a few percentage points higher than the repo rate.
If the repo rate increases, then so does the prime rate: if banks are charged more on interest, they in turn charge their clients more on interest.
How does this interest hike affect me?
If you have any debt like, for example, credit cards, personal loans, home loans and car financing, you will most likely be directly affected by the increases. Unless you had a loan agreement with a fixed interest rate, your monthly repayments will now go up.
For example: If you had a home loan of R1 million rand at an interest rate of prime plus 2, your interest would have been 11.75%, and your monthly instalment came to R 10 837.07 – if taken over 240 months. With the new increase, your interest rate will be 12.25%, and your new repayment amount will be R 11 185.65 over the same time period.
The interest rate increase will have other knock-on effects as well. Businesses, for example, will also be paying more on their loans. To counter this increase, they might be forced to increase the prices of their products and services.
The interest increase, drought, rising inflation, slow economy, low investor confidence and possible fuel, electricity and tax hikes later in the year, as well as the state of our currency, will all force us to tighten our belts.
For most of us, it is going to get harder before it gets better. The important thing is to stay motivated and stay focussed on your budget and spending habits. Counting Coins will continue to offer guidance, advice and tips while we all ride out this wave of uncertainty.