How can you make the most of SA’s interest rate drop?

Last updated on 5th August, 2020 at 04:13 pm

In a bid to cushion the blow of the Coronavirus (COVID-19) lockdown, the South African Reserve Bank (SARB) has slashed interest rates.

The reduced rate is a welcome relief for South African borrowers, at a time when many are working reduced hours or facing retrenchments. The reduction is in line with the actions of the world’s economic superpowers, like the US and Saudi Arabia, who have already implemented similar measures.

What does the interest rate drop mean for you?

Although the percentage reduction is quite significant, the impact is relative to each person and only those who have entered into variable interest rate contracts with lenders actually benefit. “Customers with a fixed contract are unaffected by increases or decreases in interest rates and so will see no change in their payments,” explains Ayanda Ndimande, strategic business development manager at Sanlam.

For those with variable interest rate contracts, a cut of this size means lower monthly home loan and vehicle repayments. Calculate your saving using Sanlam Reality’s free loan calculator.

Should you borrow more when interest rate drops?

Usually, a lowered interest rate makes borrowing more affordable for both individuals and businesses, and it’s more attractive to take on new debt. However, given the very dismal economic outlook (the top ratings firms have already ranked the country at junk, and thousands of people are facing job losses due to COVID-19), it would be better to use this opportunity to reduce existing debt and not add to it.

“At Sanlam, we suggest that where there is extra cash in the pocket, it’s best to use it to pay off current debt first. In the end, this will help to reduce the payment period and save on interest payments,” says Ndimande.

If you have no debt, or a very small, manageable amount, then use the savings from the lowered interest rate to enter into a savings or investment product for a specific purpose like retirement or university funds, for example. If there are still available funds, Ndimande suggests that you use these towards an emergency savings fund so that you are better prepared for exceptional situations like the COVID-19 pandemic.

If you have been saving up to buy a house, now might be the right time to invest in property, but speak to your financial planner to ensure you get the best value for your money.

Retaining such a low interest rate is usually a short-term measure – maintaining it over an extended period can reduce the number of options the government has to stimulate the economy. Therefore, it is essential that you act swiftly and use the opportunity to pay off as much debt as you can.

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