This interest rate cut will undoubtedly bring relief to many South African households, but it also brings a few possible opportunities to those who are disciplined enough to take full advantage of the cut.
“The announcement of the interest rate cut was a relief for all South Africans,” says Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa. “Sadly, too few individuals fully understand exactly how financing works, which means that they are unlikely to reap the full rewards of this cut,” he notes.
The 0.25% cut might not translate into massive savings on monthly repayments, but if used wisely, this cut does have the potential to save debt holders a substantial amount on interest charges. “The key to getting the most out of the cut is what debt holders choose to do with the money they end up saving,” says Goslett.
To provide an example, Goslett explains that the total monthly repayment before the cut was R21 674 on a R2m home loan. After the 0.25% cut, the monthly repayment drops to R21 329. That’s a savings of R345 each month.
“You then have the choice between two options: either enjoy having an extra R345 to spend each month; or, if you can afford to do so, you could re-invest that money in a way that results in long-term financial relief,” Goslett suggests.
“If you choose to channel the money you’re saving right back into your monthly bond repayment, thereby keeping the repayment at the rate before the interest cut, you can potentially shed months off of your lending term and save hundreds of thousands on interest charges.”
To illustrate the potential savings, by consistently adding an extra R345 to your monthly home loan repayment 4 years into your 20-year loan term, you would save approximately R115,964 in interest charges by the end of the loan term. Additionally, you would shorten your loan term by about 9 months, meaning you’d pay off the loan faster.
The same principle applies to all types of financing, including personal loans and car loans. Understanding that budgets are tight for most people, Goslett recommends that if you cannot afford to keep the repayments the same on all debts, then pick the loan with the highest interest rate charges and focus on paying that off first.
“It can be a massive eye opener to do the calculations on how much you end up paying for something once you factor in all the interest charges. Seize the opportunity whenever you are able to afford paying in extra towards debts, as this will bring far greater financial freedom in the long term,” says Goslett.
He also mentions that there is a good chance that interest rates will drop further at the next MPC meeting in November. “Now is probably the most you will pay on a home loan for a good few years to come. If you can afford to make a property purchase, now is definitely the time to do so,” he concludes.
Writer: Kayla Ferguson
Network News
www.citizen.co.za