The latest interest rate cut, announced at the end of March this year, was a windfall for South African property investors who know how to reap the rewards this decision offers. But not everyone understands how best to “capitalise” on this rate cut. This article seeks to explain these concepts in layman’s terms, to help property investors understand how they can take advantage of the rate cut.
To begin with, here are some basic definitions:
- The repo rate is the rate at which the South African Reserve Bank lends money to commercial banks.
- The prime lending rate is the rate at which banks lend money to consumers, after they have added their own mark-up to the repo rate.
But what does a ‘repo rate cut’ actually mean?
When the repo rate comes down it is normally followed by an adjustment to the prime lending rate and so the interest that you owe on your debt to the banks also comes down.
Let’s look at an example
Let’s assume you borrow a million rand for a property:
- Before the rate cut you would have paid R9 816 per month to the banks to pay off this debt over 20 years at 10.25%.
- After the rate cut to 10% this amount drops to R9 650
This saves you R166 per month on bond repayments, which adds up to nearly R2000 a year.
Alternatively, this unexpected extra monthly money could be put to good use and potentially cut a year off the term of your loan. If you were to continue to pay the extra amount into your monthly bond repayment (in other words paying the same amount you were per month before the announcement instead of the reduced amount brought about by the rate cut) you could shorten the term of your loan period by as much as a whole year. This has the knock-on effect of saving you all the interest you would have paid during that year period.
This is the power of compound interest – referred to as the eighth wonder of the world by Albert Einstein. Over a 20-year period this small additional monthly payment (and the interest it accumulates) turns into 12 months’ worth of bond repayments. Which, calculated at the prices above equals:
R9 650 x 12 = R115 800 saved.
And this is not just an advantage for people already in the property investment arena, but also opens the door for first-time investors who are considering an investment in property. The repo rate cut will mean their monthly repayments will be lower than anticipated, which in turn decreases the full amount that will be repaid over the entire lending term:
Before the interest rate cut, a one million rand property would have ended up costing R2 355 944 once the whole loan is repaid over the 20-year term including the interest on that loan.
Now, with the new, lower interest rate, a loan on a one million rand property will come to R2 316 052 over 20 years.
The property will effectively be more than R40 000 cheaper if bought now, after this rate cut.
Whether you opt to enjoy the reduced monthly payments or to reinvest the extra money into your loan repayments, the time is right to invest in property.
IGrow Wealth Homeloans is part of the IGrow group of companies and our team of home loan experts work tirelessly to ensure our investors get the best possible rate from the banks. Contact IGrow Wealth Investments today to start or grow your property investment portfolio.
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