The recent increase in interest rates to a 14-year high will impact our pockets in many ways, from home loans and credit card debt to savings and investments.
The South African Reserve Bank hiked the repo rate by 50 basis points to 8.25% last week (Thursday 25 May), raising commercial banks’ prime lending rate (the rate at which banks lend us money) to 11.75%, the highest in 14 years.
If you took out a R2 million home loan last year at the prime interest rate of 9% over a 20-year loan period, your monthly repayments would have been around R17,994. However, with prime now at 11.75%, you’ll be paying R21,674 a month – an additional R3,680.
“Such an increase may not have been factored into your affordability calculation when you purchased your property. This means you’ll either be strapped for cash, faced with increasing the term of your bond, or, in a worst-case scenario, forced to downsize to a more affordable home,” says Cherise Erasmus, a financial para-planner at Crue Invest.
If you’ve been paying additional funds into your bond, and you can afford to continue doing so, you’ll reduce the interest owed, and build cash reserves in your access bond – but not everyone can manage this.
“The rate hike will also affect those who took out vehicle finance when interest rates were low – especially those who opted for a large balloon payment,” Erasmus notes.
To help you minimise the financial fallout, JustMoney.co.za, a site that helps South Africans to make good money choices,offers practical tips.
Budget like never before: You may think you’ve done everything possible to cut back on expenses, but this is the time to sharpen your pencil and reduce any needless spending.
Prioritise high-interest debt: Focus on paying off debt, such as credit card balances and personal loans. These debts can accumulate quickly due to compound interest, so paying them off as soon as possible will save you money in the long run.
Work on your credit score: Improving your credit score takes time, but could be a huge contributing factor to securing low interest rates.
Start a side hustle: Focus on monetising a skill such as photography, graphic design, baking, or beauty treatments in order to develop a new income stream.
Explore alternative financing options: Research alternative financing methods, such as asking a family member who has the means, to advance funds at a favourable interest rate. You could also join a reputable stokvel or another peer-to-peer or community-based group. However, do your homework first. Above all else, avoid predatory lenders and loan sharks.
Explore debt consolidation: If debt is already a problem, consolidating multiple debts into a single loan can simplify your repayment process and potentially reduce your interest rates. Do first seek advice from a registered, reputable financial institution to check if this is the right option for you.
“If you find yourself struggling to make loan or credit card repayments, don’t hesitate to contact your creditors. They may be willing to offer temporary relief or alternative repayment options,” says JustMoney marketing manager Shafeeka Anthony.
“Communication is key to finding a solution that works for both parties.”
Big interest benefits: While an interest rate hike is the last thing that a borrower needs, it can work in favour of those who have investments, notes Anthony. Better returns are likely to be realised on your savings, while certain investment options such as bonds and money market funds become more appealing. Explore ways to take advantage of this, and grow your funds faster.
Increase savings: Consider setting up, or adding to, an emergency fund. Building a financial cushion can help you manage unexpected expenses and reduce reliance on expensive credit.
Check investments: This may be a good time to allocate slightly more of your portfolio to cash and bonds, and slightly less to riskier assets. However, you also need to take the impact of inflation into consideration for long-term growth.
“Seek the advice of a certified financial adviser before adjusting your investment portfolio or making any major decisions,” advises Anthony. “A trusted professional can help you develop a comprehensive strategy based on your individual circumstances and financial goals.
“Remember, while high interest rates can pose challenges, taking proactive steps can help you navigate these situations effectively.”
JustMoney.co.za is a trusted voice within the personal finance sector. The JustMoney website offers articles, money management tools, and a wide range of financial products and services. Over 250,000 South Africans subscribe to the newsletter to stay informed and become financially savvy. Find the website here.
