The South African Reserve Bank has just announced that it is holding the repo rate steady, as South Africa battles the second wave of the COVID-19. But what does this actually mean for property owners, and why should prospective buyers care if the repo rate falls or increases?
The repo rate is probably one of the most important considerations when it comes to applying for a bond, says Carl Coetzee, CEO of BetterBond
. “It affects not only the monthly repayments, but also how much interest will be paid over the entire period of the loan.” There are six opportunities for repo rate changes each year as the Monetary Policy Committee meets in January, March, May, July, September and November. “So it’s important to keep an eye on these announcements, especially if you are considering buying a home while the interest rate is at the record-low we are currently experiencing.”
The next announcement is less than two months away, so it’s important to understand what impact any changes will have on bond applications and payments.
1. What is the repo rate?
The repo rate refers to the rate at which the South African Reserve Bank lends money to private banks. If the repo rate goes up, the bank’s prime lending rate – the rate it charges customers who need to borrow money – goes up. This will affect the amount of interest that someone who has taken a bank loan will have to pay. It will also increase the monthly loan repayment amount. Conversely, a drop in the repo rate, and subsequent drop in the prime lending rate, will reduce the monthly bond repayment.
2. What is the prime lending rate?
This is the cost at which banks are willing to lend money to consumers. The repo rate has a direct impact on the prime lending rate, which is the repo rate plus the amount which the bank adds to ensure sure they make a profit on their loans. The lower the repo rate, the lower the prime interest rate. “South Africa’s prime lending rate is currently at 7%, the lowest it has been in five decades. This means that buyers can afford 30% more than they could in January last year, when the prime lending rate was at 10%,” says Coetzee. As seen below, the monthly saving on a R1 million bond, when the prime lending has dropped from 10% to the current 7%, is almost R2 000. Over a 20 year period, the interest saving would be just over R455 000.