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  • A second steep cut in interest rates in the space of the month could give South Africa's battered consumers some breathing space.
  • Following a cut of one percentage point on Tuesday, the instalment on a new R2 million home loan will be around R1,250 a month less than before the Covid-19 crisis.
  • But if you are near the start of your home loan repayments, and kept your repayment the same, and don't accept the cut, you could save more than R330,000 in interest and shorten your home-loan repayment time by up to three years. 
  • Or you could channel the money to high-interest credit, where it will make a massive difference.
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South Africans received an emergency rate cut of a full percentage point on Tuesday - more than a month before the SA Reserve Bank was due to meet again to decide on interest rates. Rates were also cut by a percentage point in mid-March

The novel coronavirus and associated lockdown has put more than half of the SA economy out of action according to one estimate, and even the central bank now expects the economy to shrink by more than 6%. It is hoped that the latest rate cut will help to further cushion the blow.

The repo rate is now 4.25%, which brings prime interest rate for South Africa to 7.75%.

How much will you save?

On a car loan of R200,000 (for a loan over five years, one percentage point above the prime rate), this means you will pay around R75 less a month. On a R20,000 personal loan (now at 19% over 24 months) you will save only around R11; the new instalment will be around R1,170.

But on home loans the cut makes a real difference: On a new R2 million mortgage at the prime rate, over twenty years, the new rate cut will mean a saving of more than R1,250 a month.

The estimated instalment will now be around R16,420 - down from R19,040 at the start of March, before the first of the two recent rate cuts because of Covid-19.

This will go a long way to ease other pressures. 

But there are two other ways you can make yesterday's rate cut work harder: 

Keep your home-loan repayments unchanged 

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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 yesterday's cut by about R1 ,250, 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 three years. And you will save more than R336,000 in interest. (And if you keep your instalment unchanged after both of the two recent rate cuts, you will pay off your house more than five years early – and save R585,000 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 

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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 R1,250 from your home loan thanks to this week’s rate cut. If you added the R1,250 to your loan repayments, you could end up paying it off 15 months early and save more than R2,000 in interest.

(Compiled by Helena Wasserman.)

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