How to prepare for and take advantage of the interest rate increase

Last updated on 7th September, 2022 at 02:57 pm

The repo rate was increased by a monumental 75 basis points in July, shifting the prime lending rate to 9%. So, what does the interest rate increase mean for your debt – and how can you take advantage of it? Read on to find out from the experts.

First – how do interest rates work, exactly?

The interest you end up paying on any credit agreements is influenced by a chain of agreements before that credit is offered to you. It’s important to understand the concept of the repo rate and prime lending rate to see how an increase in the prime lending rate affects your pocket:

Repo rate

This is the rate at which our central bank, the South African Reserve Bank (SARB), lends money to different commercial banks.

Prime lending rate

Once a commercial bank has borrowed money from the SARB, they charge their clients (like you) based on the basic interest rate – the prime lending rate – when lending out that money for loans, credit cards and similar credit agreements.

When you apply for credit at a commercial bank, the bank looks at the various risk factors of loaning you money, which helps them decide on the interest you’ll be charged on the agreement – either below, above or equal to the prime lending rate.

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Increased interest = bigger debt repayments

When the prime lending rate is increased, this has a knock-on effect on any existing or new debt in your name. Ayanda Ndimande, business development manager of Retail Credit at Sanlam, says you can expect an increase in debit orders on debt with floating interest, which ultimately means less take-home pay. But does this mean all debt is impacted, or are there exceptions? “No, not all debt is impacted,” says Ndimande. “Personal loans with fixed interest rates normally do not increase, as your rate is fixed for the term of the credit agreement.”

Naturally, this puts more pressure on your household budget – to honour your increased existing credit agreements, while still maintaining cash flow for other expenses.

How to prepare for rising interest rates

Here are some ways to free up cash flow to ensure you can stay on top of your payments and lessen the pinch of increased interest rates on your budget.

Pause on some expenses – for now

“See if you can cut back on non-essentials, even if it’s only for the interim, to release some cash flow to try and pay off debts quicker,” suggests Ndimande.

Make the most of everyday savings

Bulk deals, flash sales, bonus offers… There’s never been a better time to take advantage of these as you tighten your belt to keep up with increased debt repayments. Take advantage of discounts and deals from the service providers, retailers or loyalty programmes you use to save. Every rand counts!

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Avoid taking additional credit

The interest rate increase impacts both existing agreements and new ones, so if there’s any way you can avoid taking out credit and instead save towards larger purchases, do it. Danelle van Heerde, Head: Advice Solutions at SanlamConnect, recognises that this is easier said than done when views and behaviours related to money are ingrained in us from a young age. “Beware of the financial beliefs you hold that may prevent you from managing your debt effectively, eg ‘everyone has debt’, ‘my family has always struggled with debt repayments’, ‘I don’t earn enough to cope without (bad) debt’,” she says.

If you are going to take on additional debt, make sure it’s a smart move in the long term, ie that it will be worthwhile. “Don’t confuse good debt with bad debt,” says van Heerde. Good debt helps you to improve your financial situation, while bad debt just changes the timing of spending and adds interest and costs to what you would have paid.” Use this loan repayment calculator to find out how much your monthly repayment will be.

Speak up

If you already had credit agreements before the interest rate increased, and you’re not coping with the higher monthly instalments, the last thing you should do is stick your head in the sand in denial about how this affects your finances. “Take control and make alternative repayment arrangements if necessary,” encourages van Heerde. “Contact your credit provider immediately, so that you don’t end up with a bad credit score or blacklisted.”

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Repay more than the minimum

If you’re financially positioned to pay back more on your existing debt, do so. Knocking debt down sooner means you can protect yourself from the pinch of the increased interest on debt that would’ve hung around to be settled later.

Van Heerde’s tip for tackling it like a pro? “Repay debt with a higher interest rate first. For example: don’t just pay the minimum instalment on a credit card. Find out if you can consolidate debt with high interest rates into lower interest debt.”

How to take advantage of the interest rate increase

On the flipside of having to adjust your budget to accommodate increasing debt repayments, there’s an opportunity to grow your savings, too.

Invest in interest-bearing investments

Wayne Hutchinson, business principal and managing director of Berghshire Wealth BlueStar, authorised by Sanlam, says you can benefit from interest rate hikes by investing in interest-bearing investments where your funds will grow as interest rates increase.

But, beware: not all interest-bearing investments are created equal

Do all types of investments follow this principle? No, say Hutchinson. “As an example, generally when interest rates increase, share portfolios take a knock.”

The types of investments that do benefit from an interest rate increase are cash and bonds. “You could look at endowments, tax-free savings and unit trusts, and weigh your portfolio in more cash- and bond-denominated funds so that you can take advantage of such hikes,” explains Hutchinson. “Generally, money market investments, corporate bonds and government bonds are the best source of interest payments.”

Use this savings tool to find out how much you’ll save with monthly deposits into an interest-bearing savings vehicle.

Speak to your financial planner

Before you make any changes to your portfolio to take advantage of the interest rate increase, van Heerde and Hutchinson strongly recommend speaking with your financial planner to discuss whether this is the right move for you. To add, van Heerde says a meeting with your financial planner will leave you with the peace of mind that your budget can adjust to the added pressure of increased interest rates: “A financial planner can help you to review your monthly budget and look for opportunities to reduce the cost of your debt, as well as your current payments on short-term and life insurance, and medical aid,” she concludes.

As a Sanlam Reality member, you have a host of benefits at your fingertips to help you save on daily expenses when you need to most. Explore your benefits here.

Sanlam Life Insurance Limited is a Licensed Financial Services Provider.