The Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) started the year off with an increase in the repo rate which left many anxious and worried about how they are going to cope financially.
UNDERSTANDING THE REPO RATE AND PRIME LENDING RATE
The repo rate is the rate at which SARB lends its money to the private sector (Commercial Banks) whereas the prime lending rate is the rate at which banks use to charge interest to its clients when lending money. Even though there is a difference between the two, they work in correlation with each other – should the repo rate increase, the prime lending rate will increase too.
THE CURRENT REPO RATE AND PRIME LENDING RATE
In nearly 3 years since the change in the repo rate, the MPC in 2021 increased it by 25 basis points to 3.75% which left the prime interest rate at 7.25%. Even though another increase was inevitable, many hoped it would happen gradually. However, on the 28th of January 2022 the MPC announced that the repo rate has now increased by a further 25 basis points to 4% which leaves the prime lending rate at 7.5%.
HOW TO MAKE IT WORK FOR YOU
One of the most important goals is to secure a loan with favourable interest rates, whether it is for a home loan or a loan for the purchase of a car. However, due to the increase in the repo rate, loans will become more expensive as many people will not be able to afford repayments at a higher interest rate.
It may be difficult to see the good in this news, however, an upside to this would be that the increase in the prime lending rate will mean that the interest on any investments or savings you have will increase too. Try to save where you can and cut down on any unnecessary expenses.
If you want to secure that home loan you have been dreaming of with the new interest rate, show the bank that you are a low-risk client by:
- Providing them with a deposit which is 10% to 20% of the purchase price
- Ensuring that your credit record is clean by paying any outstanding debts and ensuring that your bills are paid timeously.
Most importantly do not limit yourself to one option by applying to one financial institution only – do your research to ensure that the bank as well as the terms and conditions which you choose suits your financial situation.