The rand
  • The prime rate has fallen by 10% from the start of the year to 7.25% this year.
  • On a new home loan of R2 million, this could mean a monthly saving of more than R3,000. 
  • By leaving your monthly instalment unchanged, or using the saving to repay high-interest debt, you will save even more.  
  • For more articles, go to www.BusinessInsider.co.za.

After another interest rate cut this week, the prime rate is now at 7.25% - from 10% at the start of the year.

On a new car loan of R200,000 (for a loan over five years, two percentage points above the prime rate), this means you are now paying R300 less a month than at the start of the year.

On a R20,000 personal loan (now at 18% over 24 months) you will save only around R30 since the start of 2020; the new instalment will be around R1,120.

But on a home loans, the cuts make a massive difference.

If you took out a new R2 million home loan at the start of the year (at the prime rate, over 20 years), your monthly instalment has fallen from R19,300 to around R15,800 – a saving of R3,500.

Given that the value of your house has also fallen by anything from will also fall by between 4% to 20%. this would bring some consolation.

READ | Here's how much less your house may be worth by the end of 2020

For many people who have lost their income during lockdown, the monthly saving will bring huge relief.

But if you don’t urgently require the cash to stay afloat, there are two other ways you can make the rate cut work harder:

Keep your home-loan repayments unchanged

If you kept your bond payment unchanged and don't pocket what you save on instalments due to the lower interest rate, you will pay off your home earlier and save a massive amount in interest.

Take for example a R2 million home loan over twenty years. Instead of allowing your monthly instalment to go down with this week’s cut by about R610, you can keep it unchanged and stick to the current payment.

If you do it near the start of your mortgage, it could cut your home loan repayment period by a year and a half. And you will save more than R167,000 in interest. (And if you keep your instalment unchanged after the three recent rate cuts, you will pay off your house almost 6 years early – and save R640,000 in interest.)

It is simple to arrange, just contact your bank to keep your payment at the current level.

Ideally, you should at the same time adjust the term of your home loan to shorten it, otherwise you may have to pay fees and charges even after you have paid off your home loan.  A home loan needs to go through a cancellation process with a conveyancer in order for the property to be transferred into your name.

Use your home-loan saving to repay high-interest debt

You could also choose to channel your home-loan rate-cut saving to debt with higher interest rates, particularly credit cards and personal loans.

On a personal loan of R20,000 over three years, at an interest rate of around 19%, you will pay interest of around R10,500.

But say you were a year into the loan, and you now have an extra R610 from your home loan thanks to this week’s rate cut. If you added the R610 to your loan repayments, you could end up paying it off 12 months early and save more than R1,500 in interest.

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