The one percentage point drop in the Reserve Bank’s key repo rate will be very welcome in light of the struggle that faces South Africa’s property market in 2020, says Tony Clarke, managing director of the Rawson Property Group.
The Reserve Bank’s announcement on Thursday (19 March) will see the repo rate drop from 6.25% to 5.25% and the prime rate from 9.75% to 8.75% – its lowest level in years.
For existing homeowners with bonds, this will mean a reduction in their monthly instalments of R65 per R100,000 outstanding – or R650 per month on a R1 million bond, said Clarke.
“This is a significant amount and we would urge those who can afford to do so to keep paying their current monthly instalment as long as they can, to reduce the capital amount owing on their bond, pay their homes off faster and save on interest.”
He noted that by paying an additional R650 a month off a R1 million bond, a homeowner could cut the usual 20-year bond repayment period by more than three years and stand to save some R209,000 in interest.
The below table shows the effect of the drop in the interest rate on a 20-year bond:
“For home buyers, this week’s rate cut will make it easier to qualify for home loans, since it will also reduce the instalments they have to pay on any other kind of debt, from car instalments and school fees to credit and store card balances, and they should thus have more disposable income available to cover a monthly bond repayment,” said Clarke.
However, he warns that buyers should be cautious about taking the rate cut as a signal to obtain a bigger home loan than they were previously contemplating.
“This cut and the additional ones expected later this year will bring rates close to historic lows, which means they can be expected to rise as soon as the economy improves,” he said.