Interest rate fluctuations and economic policy announcements can have a big effect on your property, home life, and savings. We help you better understand the Repo Rate, and how it affects your home and lifestyle.
What is the Repo Rate?
You know it, and have heard it, as the Repo Rate, but its full name is the Repurchase Rate. The Repo Rate is set by the South African Reserve Bank’s Monetary Policy Committee. As the institution that governs and manages all money in South Africa, the South African Reserve Bank (SARB) also lends money to our commercial banks when it’s required. Our commercial banks are the same financial institutions you operate your transactional accounts through, use to obtain credit, and through which you may have a home loan, bond, or mortgage. The Repo Rate is the standard interest rate that SARB charges to commercial banks when it lends money to them. This can have wide-ranging effects on your credit facilities, home loans, and similar financial agreements. Changes to the Repo Rate are often made to scale back or control inflation.
Why does the Repo Rate change?
Due to the fact that the Repo Rate is a tool for maintaining or managing economic circumstances and, in particular, controlling inflation, the SARB’s Monetary Policy Committee regularly adjusts it, in accordance with the country’s economic climate. The SARB works extremely hard to keep the rate of inflation between 3% and 6% within a single financial year. Anything beyond that could lead to extreme price surges, and other worrying economic effects, leaving consumers like you and I, at a loss for how to make ends meet.
How does a Repo Rate adjustment help?
An increased Repo Rate discourages commercial banks from borrowing more money from SARB, and this can help to curb inflation. A decreased Repo Rate makes it easier for commercial banks to borrow money from SARB, but this also means that inflation could rise.
How does a Repo Rate change affect your Home Loan?
Commercial banks, like the financial institution you have a home loan with, do need to borrow money sometimes. Moreover, just as you have to pay back any loan you take, your bank does too. To maintain their liquidity and ability to borrow money when needed, your bank will adjust the interest rates they charge when an adjustment is made to the Repo Rate. An increased Repo Rate will push your interest rate up, unless you have negotiated a fix interest rate on your loan facility. For home loans, bonds, and mortgages, an increased Repo Rate will mean an increased Prime Lending Rate, leading you to pay more for your loan facility. Incidentally, however, if the Repo Rate is decreased, the Prime Lending Rate at your bank will decrease, and you will pay less on your home loan, mortgage, or bond. A decreased Repo Rate could lead to big savings on your monthly repayments, and the total amount of money you’ll need to pay back over the loan period. When the SARB’s Monetary Policy Committee leaves the Repo Rate unchanged, it can be a good sign for consumers, as the country is seen to be experiencing a time of relative economic stability.
What is the Prime Lending Rate?
The Prime Lending Rate is the benchmark interest rate that your financial institution assigns to any loan facility you take out with them. The particular interest rate you’re charged can be affected by a range of variables, including the type of loan facility you’re looking for, your economic circumstances, and your credit record. Your bank could offer you a below-Prime interest rate, or an above-Prime interest rate, depending on the outcome of your loan assessment and the type of loan facility you’re looking to take out. A seemingly risky customer could be charged an above-Prime interest rate by the bank, while a more financially stable customer could be charged a Prime or below-Prime interest rate on their loan facility.
How does the Repo Rate affect your lifestyle?
If the Repo Rate increases, this can affect the Prime Lending Rate, and the interest rate that you’ll be charged for any loans or credit facilities you use. That can lead to you paying more for your clothing accounts, or to pay back any money you may owe. In terms of your monthly budget, that can affect your ability to pay your bills or contribute towards your savings. While having a credit history is important, it’s even more important that you keep your credit history as clean as possible. Of course, if your loan and debt repayments increase, you’ll have less money available to pay for groceries and other life essentials. Make your monthly budget using a frugal approach, and you should be equipped to cater for any increased interest rates.
Please note: as at January 2019, the Repo Rate was set to 6.75%. For more information on how inflation, the Repo Rate, and other interest rates, can affect your home loan, please contact your financial advisor.