Interest rate cut: Your savings on a R1 million bond over 20 years

The South African Reserve Bank’s (SARB) monetary policy committee (MPC) is set to meet this Thursday, with potentially positive news for those struggling with debt.

The meeting is scheduled for Thursday, 19 September with the official announcement due shortly after 15:00.

The MPC is widely expected to cut interest rates by 25 basis points (bps).

As a reminder, the repo rate currently stands at 8.25% with the prime lending rate at 11.75%.

The MPC has hiked interest rates by a cumulative 475 basis points since 2021, despite keeping the rate unchanged at the last seven meetings.

The current repo rate of 8.25% represents a 15-year high (since 2009) and has had scores of South Africans desperately struggling to finance their debt.

Encouragingly, while four members of the MPC voted to keep rates unchanged at the most recent meeting in July, two at the time already voted for a 25 basis point cut. 

What would a 25 basis point cut mean in monetary terms?

By way of an example (see graph below), a bond of R1 million over a standard 20-year term with repayments at prime (11.75%) currently costs R10 837 per month to finance.

Should the SARB cut that prime lending rate by 25 basis points to 11.50%, that will mean a monthly bond repayment amount of R10 664.

That represents a monthly saving of R173.

Over the course of 20 years (240 months), that equates to a saving of R41 466, on the assumption there would be no further rate changes during that period.

But here are the scary numbers!

To finance a R1 million bond over 20 years at prime does NOT cost R1 million. In fact, it costs a staggering R2 600 897.

Do the sums yourself.

R10 837 x 240 months = R2 600 880 (give or take a few cents per month).

A rate cut of 25 basis points, as mentioned, reduces the monthly repayment to R10 664.

That changes the total repayment over 20 years to:

R10 664 x 240 months = R2 559 360.

But here’s the scariest part …

As mentioned, the SARB has hiked interest rates by 475 basis points over the last 15 years, meaning in 2009 the prime lending rate stood at 7%.

The same calculation above on a R1 million bond at prime (7%) over 20 years once cost R7 753 per month.

That’s R3 084 less per month than it currently costs before any rate change this week.

Or … R740 160 over the course of the full 20 years if you prefer.

SARB MPC MEETING DATES FOR 2024

The MPC meets every second month.

The SARB’s final meeting of the year will take place on Thursday, 21 November, where, according to BusinessTech, another 25 basis point cut is potentially on the cards.

Monthly bond repayments calculator

The South African website’s table below shows the current monthly bond repayments on various bond values over a 20-year period assuming no deposit and that repayments are at prime (11.75%) as well as the expected cost after next week’s 25 basis point cut and the monthly saving that would entail: