Personal-Finance

The interest rate hike and your money

2018-12-09 06:00

The SA Reserve Bank this week announced a 25 basis point increase in the repo rate – from 6.5% to 6.75% – which has increased the prime lending rate to 10.25%.

This decision effectively reversed the rate cut in March and is the first rate hike since early 2016.

There are also indications that this is the start of a rate hike cycle, with economists predicting another three rate hikes next year.

If they are correct, prime could be as high as 11% by the end of next year, so cutting back on credit must be a priority.

WHAT IS THE REPO RATE?

The repo rate, currently at 6.75%, is the rate at which the SA Reserve Bank lends money to commercial banks in the event of any shortfall of funds.

It is important to note that banks do not necessarily borrow from the Reserve Bank as it is only a lender of last resort.

Banks will be borrowing and lending to each other at the interbank lending rate, which is higher than the repo rate – currently just over 7%.

The repo rate is used by monetary authorities to control inflation, as most lending rates are linked to the repo rate.

The theory is that if you make lending more expensive, people borrow less and therefore spend less, reducing pressure on inflation

WHAT IS THE PRIME RATE?

The prime rate, now at 10.25%, is linked to the repo rate. In theory, the prime lending rate is the rate a bank charges its best risk or “prime” clients, hence the term prime.

In practice, it has become a benchmark against which to price risk and to provide a comparison.

So, although the banks all use the same “prime” rate, the actual rate that a customer will pay will be determined by various factors – the risk rating of the customer, the rate at which the bank has borrowed and the risk appetite of the bank at that point.

BORROWING:

YOUR HOME LOAN

Depending on how many years you have left on your loan, for every R500 000 that you owe on your mortgage, an increase of 0.25 percentage points will increase your repayments by about R80 a month.

If we have further rate hikes, you could be paying as much as R320 more a month for every R500 000.

A few weeks ago, we wrote about ways to negotiate a better interest rate with your bank, so now may be a good time to make that call.

YOUR CAR FINANCE

For every 0.25 percentage point hike, your R250 000 car finance deal will cost about R45 more each month.

So, further rate hikes could see your car finance increase by R180 a month by the end of next year.

This is on top of the extra money you are paying out for recent petrol price increases.

Car sharing is one way to help cut costs and any saving you make should be added to your car repayment.

UNSECURED DEBT

Short-term debt of less than six months will not be affected by the rate increase as micro loans are able to charge between 3% to 5% a month, and it is not linked to the repo or prime interest rate.

For loans of six months or more, whether the interest rate hike affects your personal loan will be determined by your agreement and whether you have a fixed or variable rate.

If the quotation specifies a variable rate, the interest rate will automatically increase or decrease in accordance with the respective prime rate or National Credit Act rate factor as specified in the quote.

For example, Capitec loans are at a fixed rate, so any changes to the interest rate will only affect new loans.

However, Capitec says its starting rate for term loans will remain unchanged at 12.9%, even for new loans, however it will adjust the maximum rates.

The maximum rate that a credit provider can charge will go up as the cap is based on the underlying repo rate.

With a 0.25 percentage point increase in the repo rate, the maximum rate on unsecured credit will increase from 27.5% to 27.75%.

These maximum rates will all increase in line with any further rate hikes.

It is possible that, by the end of next year, the maximum rate could be 28.5%.

CREDIT CARDS

As credit cards are not on a fixed interest rate, you can expect an increase in your credit card rate by 0.25% percentage points. The maximum that can be charged on a credit card has increased from 20.5% to 20.75%.

By the end of next year, that could reach 21.5%.

SAVING:

INVESTMENTS

While our debt costs may be rising, the upside is that some of our cash investments will be receiving a better return.

However, it will depend on whether or not you are invested in a fixed deposit. Remember that when you select a fixed deposit, that rate is set for the full period of the investment irrespective of interest rate changes.

FIXED DEPOSITS

Absa says that, although existing fixed deposit customers may not benefit, generally speaking, the fixed deposit rate has been highly competitive, and customers have benefited from already higher rates.

Fixed deposit rates are less determined by the repo rate than shorter-term deposits and tend to be driven by the bank’s need for longer term deposits to meet their lending book.

Banks also factor in a potential rate hike when offering a higher fixed deposit rate and, as you may have noticed, fixed deposit rates have been increasing recently.

According to Nedbank, “much of the 25 basis point increase would have been priced into our fixed deposit prices prior to the actual increase on Thursday”.

FNB says that while its fixed deposits do not move in line with the repo rate, its Flexi Fixed Deposit is an exception as it provides customers with earlier access to a portion of their investment.

This is why the Flexi Fixed Deposit rates have been increased by 0.25 percentage points.

NON-FIXED SAVINGS

Capitec says that, while the rate hike will not affect fixed deposits, it will be increasing deposit rates on flexi savings, including fixed-term multiple deposits and tax-free savings accounts.

Absa says it will be passing on the rate hike to savers.

The Absa tax-free savings and instant access products like Depositor Plus, TruSave, stokvel products, travel club, investments clubs and grocery clubs will receive an additional 0.25% in interest rates with immediate effect.

Furthermore, Absa notice products such as Notice Select, Investor Plus, TargetSave and Future Plan have also been adjusted.

Nedbank told City Press that its notice deposit rates “will increase substantially in line with the 25 basis point hike”, and that rates for new fixed deposits will increase.

FNB has increased interest rates on all call and notice products (and the Flexi Fixed Deposit) except for the Money Maximiser and Cash Intelligence Index products as these track the Short-term Fixed Interest Index and RMB Cash Intelligence Index, respectively.

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January 20 2019