Business

Rate cut: relief for consumers

10 September 2010

The Reserve Bank's latest interest rate cut will provide relief to many South African consumers struggling with debt repayments against the background of continued tight labour market conditions in the first half of the year, says banking group Absa.

The Bank's monetary policy committee (MPC) reduced the repo rate by 50 basis points to six percent on Thursday.

"The lower mortgage rate will support the housing market and benefit the affordability of housing, against the background of property prices rising by more than 10% year-on-year in the first eight months of the year," said Luthando Vutula, managing executive of Absa Home Loans.

As a result of Thursday's announcement, commercial banks also cut their prime and mortgage rates by 50 basis points to 9.5% – the lowest level since mid-1974.

Lowest level since mid-1974

"Mortgage repayments will now be as much as 31% lower than in late 2008, when the mortgage rate was at a level of 15.5%," Vutula said.

"Back then, the monthly repayment on, for example, a mortgage loan of R500 000 over a 20-year term was R6 769. After today's rate cut, the repayment on such a loan amount will amount to R4 661 per month, which translates into a cumulative saving of no less than R2 108 since late 2008.

"Based on the prospects for the local economy, and especially inflation, interest rates are forecast to remain unchanged for the rest of the year and throughout 2011, with the first rate hike only expected in the first quarter of 2012," he added.

Affordable property purchasing

Vutula concluded that "although the housing market will probably not be further stimulated by interest rates in the current cycle, stable rates during the course of next year will provide the opportunity for many households to further recover financially and afford the purchase of property".

According to Sydney Soundy, managing executive of Absa Vehicle and Asset Finance, the rate cut will help off-set the impact of the carbon emissions tax on passenger vehicles when it comes to new passenger vehicle pricing. The increase in prices of vehicles resulting from the emissions tax is expected to average between two and three percent.

Customers will save on car loans

In terms of monthly repayments, the latest interest rate cut means that a customer paying off a vehicle loan of R100 000 over 60 months can expect to pay R300 less in premiums per annum. This equates to a saving of R25 per month.

On a R200 000 vehicle loan over 60 months, customers will save about R600 per annum and about R50 per month. Customers currently paying off a R300 000 car loan over 60 months can look forward to savings of up to R900 per annum and R75 per month.

Since interest rates have decreased by six percent since December 2008 (including the latest cut), customers managing a R150 000 vehicle loan and a R500 000 mortage loan would have realised a monthly saving of R471 and R2 108 respectively thus far. The collective household annual saving for the same scenario is R30 948.

Research has shown that the 2009 economic recession prompted many consumers to cut back on (or cancel) motor vehicle insurance. Soundy advises customers who are uninsured or underinsured to use the savings that result from the interest rates cut to reinsure their assets.

'Use extra cash to service debt'

Soundy further encouraged those customers who were adequately insured to avoid spending "any extra cash on luxury goods, but to service their debt instead".

"For example, by increasing their mortgage loan repayments, customers will be able to shorten their repayment terms and loan amount in the long run. Any other surplus money should be invested and saved for the future," Soundy said. "South Africans should embrace the culture of saving, as this has a wide range of advantages, including the creation of a financial safety net for any future uncertainties."

Sapa