Rate cut winners and losers

The 100 percentage point interest rate cut last week means that we have seen the prime interest rate fall from 10% to 7.75% this year.

This will come as a welcome relief to many South Africans with home loans and other debt.

If you can continue to meet your usual bond repayments, these rate cuts offer an excellent opportunity to reduce the term of your loan.

On a R1 million mortgage over 20 years at the prime interest rate, your repayment since the start of the year has effectively fallen from R9 650 to R8 209.

Instead of pocketing that saving, if you kept your repayments at R9 650, you would pay your mortgage off 68 months earlier (nearly six years), and save R312 000 in interest and fees – assuming that the interest rate does not increase during the remainder of your mortgage.

However, it does show how we can use rate cuts to pay off debt without an impact on our pockets.

Pensioners and other savers, on the other hand, will be hit hard because deposit rates are linked to the government repo rate.

They have effectively experienced a 28% reduction in interest earned unless they opted for a fixed interest rate over a certain period.

For example, on R100 000, if the interest rate since January fell from 8% to 5.75% today, the interest earned this year will fall from R8 000 to R5 750.

Savers need to look for other interest opportunities.

A good option would be the RSA Retail Bond, which is priced off the bond rate and not the repo rate. Currently, it is paying 9% for a three-year fixed deposit, or 11.5% for a five-year period.

People who are about to retire could also consider purchasing a fixed guaranteed annuity as these rates remain relatively attractive compared with cash.

A 65-year-old targeting an increase each year of 70% of inflation can receive a rate as high as 7.5%.

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