What the rate cuts mean for you

What is the difference between the repo rate and the prime rate?

The repo rate is the rate at which the SA Reserve Bank lends money to other banks as a lender of last resort. The repo rate has been reduced from 6.5% to 4.25% this year.

The repo rate underpins all lending and deposit rates in South Africa and is, therefore, a way for the central bank to influence the extension of credit in the country.

It is important to note that banks do not necessarily borrow from the Reserve Bank and usually borrow in the interbank market – meaning they borrow from one another depending on their liquidity needs.

This is known as the Johannesburg interbank average rate, which is usually higher than the repo rate.

The prime interest rate is the benchmark banks use to price the risk of lending.

“Prime” is the benchmark rate for a customer with a good credit record and a bank will price above or below that, depending on the underlying risk of the customer, type of loan and risk appetite of the bank.

So, although the prime rate is the same across all banks, banks still compete on the interest rates they charge a customer. The prime interest rate is linked to the repo rate and is now 3.5 percentage points above the repo rate at 7.75%.

Does a bank have to cut interest rates on loans when the repo is cut? 

The maximum interest rate a credit provider can charge is determined by the National Credit Act (NCA), which stipulates a percentage above the repo rate.

For example, a personal loan cannot have an interest rate higher than 21% above the repo rate (25.25%), a credit card maximum is 14% above it (18.25%) and the maximum for a mortgage is 12% above (16.25%).

Loans of up to six months have a set maximum of 5% a month.

In most cases, loan agreement credit providers use the prime interest rate rather than the repo rate, although the prime rate is linked to the repo rate and the NCA maximums still apply.

Your loan agreement will stipulate that the rate you pay is linked to prime and will move in line with changes to the prime interest rate.

Read: Rate cut winners and losers

This means the interest rate charged on your debt will be affected by a rise or fall in the repo rate as this influences the prime interest rate, unless you opted for a fixed interest rate for the period of your loan.

Some people, when taking out a loan, or car or house finance, want certainty that their instalments will not increase so they fix the rate.

While they will be protected from a rate hike, they will not benefit from the rate cut.

Will I get less interest on my savings account?

A cut in the repo rate affects the amount of interest you receive from your deposits at the bank.

Deposits are affected by the prime interest rate because banks use deposits to provide loans.

If they are receiving less interest from loans, they will pay the depositor less interest. However, there is more discretion when it comes to deposit rates.

If banks are looking for more deposits, they might compete for deposits by offering attractive deposit rates.

In the last rate cut we saw many banks dropping their deposit rate by only 0.5 percentage points and some banks, such as African Bank and TymeBank, maintaining their higher deposit rates.

The good news is that if you already had a fixed deposit for a period of time (a six-month or even five-year fixed deposit), the bank cannot reduce the rate agreed at the time.

How soon after a rate cut is my mortgage or car finance adjusted?

Nedbank says that when the Reserve Bank announces changes to the interest rate, the interest rate linked to the home loan account is adjusted immediately.

As the interest accrues daily, this means that in the case of this rate cut, from April 1 to 14, the daily interest would have been calculated at 8.5% and from April 15 to 30 the daily interest would have been calculated at 7.5%.

The instalment on the home loan account is recalculated as at April 15, with the newly updated instalment due on the first day of the following month, providing an immediate benefit to customers.

Should I fix my interest rate?

With interest rates so low, is it time to fix your home loan rate? The problem is that fixed rates are always higher than the current rate, in the same way that a bank offers a higher interest on longer-term fixed deposits.

Steven Barker, head of lending products at Standard Bank, says rates are more likely to reduce further so it might not make sense to fix your interest rate.

Standard Bank offers fixed-rate contracts on home loan agreements over 12 months at 7.75% and fixed-rate contracts over 36 months at 9%.

“The fixed rate being offered will depend on the interest rate outlook at the time the contract is entered into.

We typically find that fixed-rate agreements cost less when interest rates are expected to reduce and, conversely, this costs more when interest rates are expected to increase.”

FNB says that if a customer wants to fix their rate for 36 months, they will be charged an additional premium of 1.1 percentage points.

In other words, if your rate now is at prime 7.75%, your new fixed rate would be 8.85%. For a five-year fixed rate, you would pay 9.85%.

Rather than fixing at a higher rate, increase your repayments. For example, on a R500 000 mortgage, rather than fixing for 36 months at 8.85%, increase your instalment by R350.

You know you will be able to absorb any future rate hikes and that extra payment goes straight to paying off your capital rather than servicing a higher interest rate.

Read: We will need more than rate cuts to survive

Can I use this rate cut to reduce the term of my loan?

If you can continue to meet your usual bond repayments prior to the rate cut, these rate cuts offer an excellent opportunity to reduce the term of your loan. For example, on a R500 000 mortgage, this rate cut will reduce your repayment by R350.

If you continue to pay this into your mortgage, you could pay your home loan off nearly two years earlier – assuming rates do not increase again.

The same applies to car finance. However, you need to contact your car financing house to ask them to maintain the original repayment amount.

Faisal Mkhize, managing executive: Absa Vehicle & Asset Finance Trade Centre, Absa retail and business banking division, says customers can provide the bank with an instruction to increase their instalment amount or set it at a fixed monthly payment (equal to their instalment prior to the interest rate cuts).

The bank will restructure the loan agreement, which will result in a reduction of the finance term (and interest paid). Another option is to set up a stop order to increase those payments.

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