Interest rate: Positive news for South African homeowners

The South African Reserve Bank’s (SARB) monetary policy committee (MPC) is set to hold its sixth and final meeting of the year on Thursday, 21 November.

And after a financially difficult year for many, there’s expected to be some GOOD news for those South Africans in debt around 15:00.

As reported by The South African website, inflation dropped to its lowest level in four years last month, paving the way for an interest rate cut.

Economists are split between a 25 and 50 basis point reduction.

Wouldn’t that be a welcome early Christmas present!

Such a scenario would mean lower monthly bond repayments for homeowners – and good news for those looking to enter the property market for the first time.

However, as detailed by The South African website, paying less per month in bond repayments is NOT always the smart thing to do!

Here’s WHY

Finance debt

As a quick reminder, the SARB’s six-member monetary policy committee cut the interest rate by 25 basis points at their most recent meeting in late September.

That saw the repo rate drop to 8% while the prime lending rate currently stands at 11.50%.

The MPC had hiked interest rates by a total of 475 basis points since 2021, despite keeping the rate unchanged for the prior seven meetings – until the most recent announcement.

That had represented a 15-year high (since 2009) and had several South Africans struggling to finance their debt.

What would a 50 basis point cut mean in monetary terms?

By way of an example (see graph below), following the interest rate cut in September, 20-year repayments at prime (11.5%) on the average house bond in South Africa of R1 458 924 currently costs R15 558 per month to finance.

Should the SARB cut that prime lending rate by 50 basis points to 11%, that would mean a monthly bond repayment of R15 059.

That represents a monthly saving of R499.

Over the course of 20 years (240 months), that equates to a total saving of R119 760 – on the (unlikely) assumption that there are no further rate changes during that period.

But here are the scary numbers …

To finance a R1 458 924 bond over 20 years at the forecast prime lending rate (11%) will NOT cost R1 458 924.

In fact, it will cost a staggering R3 614 123.

Do the sums yourself:

R15 059 x 240 months = R3 614 160 (give or take a few rands)

Meanwhile, a 25 basis point cut on Thursday would be roughly HALF the saving mentioned above and in the table below.

Monthly bond repayment table

The South African website’s table below compares current monthly bond repayments on various bond values over a 20-year period assuming no deposit and repayments at prime, to the potentially new cost after this month’s expected 50 basis point cut – and the monthly saving that would entail:

SARB MPC MEETING DATES FOR 2024

The MPC meets every second month.