Money and Markets

You can save thousands by making the new rate cut work harder for you - here's how

Business Insider SA
Lesetja Kganyago, governor of the South African Reserve Bank. The bank's monetary policy committee announced a 25 basis point cut on Thursday.
  • The rate cut of 25 basis points, announced on Thursday, won't mean a massive monthly saving on your vehicle or personal loan instalment.
  • But with your home loan, the reduction in your monthly payment will be more noticeable.
  • However, you can save thousands of rands - and shorten your home-loan term - if you don't accept the reduced payment. 
  • For more stories, go to Business Insider SA.

As expected, the Reserve Bank cut interest rates by 25 basis points on Thursday.

This is bad news for savers, particularly retirees who are dependent on income from savings. 

But for many struggling households, this will be their first break after months of hardship due to higher taxes and sky-high fuel prices.

Unfortunately, on short-term debt, it won't make much of a difference:

  • On a car loan of R200,000 (for a loan over five years, at the prime rate), you will only save R25 a month. 
  • On a R10,000 personal loan (at 22% over 24 months) you will save a single rand - the new instalment will be R649.

On home loans, however, a rate cut will be noticeable: On the average R2 million home loan at the prime rate, the new rate cut will mean a saving of more than R300 a month.

This will go a little way to ease other pressures, including higher electricity bills which have started to kick in over recent weeks.

But there are two other ways you can make the rate cut work harder:   

Keep your home-loan repayments the same

If you kept your bond payment unchanged – you will pay off your home earlier and save a massive amount in interest.

Take for example a R2 million home loan. Instead of allowing your monthly instalment to go down with the rate cut by about R330, you can keep it unchanged and stick to the current payment.

Over the course of twenty years, this will cut your home loan repayment period by a full year. And you will save more than R150,000 in interest.

The orange line shows what would happen to a R2 million home loan if you paid R330 a month extra.

It is simple to arrange – just contact your bank to keep your payment at the current level, says Andrew van der Hoven, head of Standard Bank Home Loans.

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 card and personal loan debts.

On a personal loan of R20,000 over three years, you may end up paying an interest rate of nearly 28% (compared to the prime rate, which is now 10%).

“If you have unsecured lending, it makes sense to pay that down first,” says Van Der Hoven.

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