In September 2022, the South African Reserve Bank’s Monetary Policy Committee hiked the repurchase rate (repo rate) by 75 basis points, which means that the repo rate will now be 6.25% per year from 23 September 2022, with prime at 9.75%.

Interest rates in South Africa have recently been very volatile, with the fluctuations affecting people differently depending on whether they’re an investor or a borrower. For instance, if you have invested in interest-bearing investments like money market funds, cash or fixed deposits and/or bonds, a falling interest rate would be to your detriment. Seeing as these types of investments are directly correlated to the interest rate, it would be self-explanatory that rising and falling interest rates would naturally cause the yield on these investments to rise and fall.

On the other hand, if you are a borrower and have, for instance, a mortgage bond, a rising interest rate would result in an increase in your monthly repayments on the debt. It is highly unlikely that as a retail lender from a registered credit provider you would have a fixed interest rate. Most credit providers provide financing on cars and properties with a floating interest rate linked to the prime interest rate.

When dealing with interest rates, it is important to understand the distinction between the repo rate and the prime interest rate. The repo rate is the rate at which the South African Reserve Bank (SARB) lends money to commercial banks, whereas the prime interest rate is the entry-level rate at which commercial banks such as Absa, FNB, Standard Bank and Capitec lend money to customers.

When Covid struck South Africa, the SARB made a decision to drop the repo rate in an attempt to reduce the rate at which commercial banks lend money to consumers. The end result of this move was that, if you have a floating interest rate, the rand amount of your monthly repayment would have been lower because the interest portion would have been lower – ultimately putting more disposable income back into the pocket of the consumer and something that came of great assistance, especially those whose income had been reduced as a result of the pandemic.

When the repo rate was slashed during lockdown, many South Africans took advantage of this low-interest-rate environment to purchase property with what was seen to be cheap home loan financing. While it is both common and understandable that many people take advantage of a low-interest environment to purchase assets such as property and/or vehicles, it is important to consider one’s future affordability should interest rates increase to normal levels. Always bear in mind that drops in interest rates are strategically planned and do not last over the longer term, and your financial plan should be appropriately geared to ensure future affordability if and when interest rates increase.

Ideally, a drop in interest rates should be seen as an opportunity to save the money that you would have paid towards your bond repayments. Thus, instead of reducing your bond repayments in line with an interest rate reduction, the better approach would be to keep your bond repayments unchanged so as to reduce the interest and build cash reserves in your access bond (if you have such a facility).

As we emerged from the pandemic into a more normal way of living, the SARB has been bold in its steps to increase interest rates to pre-pandemic levels which have had the opposite effect on investors and borrowers alike in that those owing money will be faced with higher interest on their loans while investors will earn more interest on their interest-bearing investments.

The recent interest rate hike will also affect those who took out vehicle financing during the low-interest environment, particularly those who saw the opportunity to finance a car with a low interest rate and a large balloon payment. A balloon payment is where a percentage of the vehicle’s value is taken off the financed amount, with this balloon or residual amount becoming payable as a lump sum at the end of the financing period. Increasing interest rates will result in the consumer having to pay a higher monthly instalment on their car repayment as well as a higher balloon payment depending on the structure of the loan agreement.