The South African Reserve Bank’s decision to cut the benchmark repo rate by 25 basis points is welcome news for cash-strapped consumers. Although only a small change on paper, the drop provides a much-needed financial reprieve.
A basis point – a unit of measure used in finance to denote a change in a percentage – is equal to one-hundredth of a percent (0,01%). A 25-basis point cut, therefore, results in a 0,25% drop in the prime lending rate, bringing it down to 10,5%.
This latest interest cut will immediately reduce monthly repayments for those who have loans with variable interest rates. This includes home loans, vehicle finance, credit cards, and other personal loans.
On a R1-million home loan over 20 years, for example, a 0,25% drop in the interest rate could save you around R168 per month. While this might not seem like much, these savings add up to over R40 000 over the full term of the loan. A lower prime rate will also reduce the monthly instalment on your vehicle finance, freeing up a small amount of cash each month.
High-interest debt is where the impact is often most significant. For credit cards or personal loans linked to the prime rate, the cost of servicing your debt will decrease, giving you more breathing room in your budget.
Therese Grobler, head of wealth management at Momentum Financial Planning, explains that if you have a fixed-rate loan, your monthly repayments will not be affected by this change. “However, a rate-cutting cycle could be a good time to re-evaluate your fixed-rate agreement,” Grobler says. “Speak to a financial advisor about your options.”
While it’s tempting to see the extra money in your pocket as an opportunity for extra spending, the true power of this rate cut is the opportunity it offers to accelerate your financial goals. “The real benefit of this interest rate cut lies in how you choose to use this relief.”
Rather than viewing it as free money, Grobler suggests considering these strategies to make the cut count:
- Pay off debt faster: The most impactful use of this extra cash is to pay more towards your debt. By maintaining your previous higher monthly payment, you will pay off your loan sooner and save a significant amount on interest. For example, by using the R168 saving to increase your home loan payment, you can shave months or even years off your loan term, resulting in tens of thousands of rands saved in interest. Start with high-interest debt like credit cards first to make the biggest impact.
- Build an emergency fund: Use the freed-up funds to build or boost your emergency savings. An emergency fund acts as a financial buffer, protecting you from unexpected expenses like a car repair or a medical emergency, preventing you from having to take on more debt in the future.
- Invest for the future: If your debt is under control, the rate cut is a good time to increase your contributions to long-term investments. Even a small, consistent increase can have a huge impact over time thanks to the power of compound interest. A financial adviser can help you determine the best investment vehicle for your goals.
“Ultimately, this latest interest rate cut is not just about a few extra rands in your pocket but rather a moment to pause and review your entire financial plan. A holistic plan is the key to weathering economic cycles and achieving long-term financial goals,” says Grobler.
She suggests using this opportunity to review your budget and see where you can make further adjustments and re-evaluate your insurance, life and healthcare policies to ensure you are adequately protected.
“Talk to a financial adviser to create a strategy that is tailored to your unique circumstances and future aspirations. By making an active, informed choice to use these savings wisely, you can turn a small change in the interest rate into a positive step toward establishing financial resilience and long-term security,” Grobler concludes.