The interest 1% rate cut announcement on Thursday the 19th of March was a breath of fresh air in a world gone mad as the spreading coronavirus disrupts businesses and financial markets, meaning the repo rate drops to 5.25% and the prime rate to 8.75%. If you have debt, the interest rate cut by the Reserve Bank may put some additional Rands in your back pocket, which is welcome relief in these tough economic times. If you are on the other hand sitting with cash in a money market account, the interest rate cut will have the exact opposite effect, with the interest you may earn reducing by up to 1%. If you are able to continue paying the same premium you are currently paying before the interest rate cut on your debt, it would be wise to keep paying your bills at this current level to reduce your debt and future interest rate payments.
What does the interest rate cut mean for us as South Africans?
Reduced loan repayments
Based on a one percentage point cut in interest rates your savings on your home loan will look like the following:
|Bond value||Saving per month||New monthly payment at 8.75%||Old monthly payment at 9.75%|
|R1 million||R648||R8 837||R9 485|
|R1.5 million||R972||R13 255||R14 227|
|R2 million||R1 296||R17 674||R18 970|
|R3 million||R1 944||R26 511||R28 455|
Lebogang Gaoaketse, head of marketing and communication at Wesbank, confirmed that on a car loan of R312,000 financed over 72 months at an interest rate of 10.75%, you would now pay an instalment of approximately R6,000. The impact of the rate cut will reduce the instalment by approximately R170 a month. Over the 72-month contract period, should the interest rate stay the same, the rate cut would equate to a reduction of R12,240 in interest payable.
If you are able to keep the debt repayment amount at its original amount, it will mean you will be able to pay the debt off more quickly, which will amount to a large savings on interest payable. It is always advisable to first pay more into the debts with the highest interest rate, which will amount to the biggest savings on interest in the short-term, and thereafter make additional contributions to other debts. Paying extra into debts may also cushion you against financial shocks that may come later as a person will have a reduced debt level, and therefore less income needs to be directed to debt needs.
It is largely expected that household income of consumers working in industries that are significantly affected by the Coronavirus, such as tourism, hospitality, entertainment, restaurants and shopping malls, will be negatively affected, and therefore it is of utmost importance that individuals effected do have their debt repayments well under control. If you don’t already have sufficient funds in an emergency savings account, the savings from the interest-rate cut, as well as the drop in petrol prices, can also be used for this purpose, ensuring you have access to additional funds should you need it. Ideally, you should have at least enough to cover three months’ expenses, which will protect you from dipping back into debt each time there is an unexpected expense, costing you more in interest every time.
For your investments
As mentioned above, unfortunately if you are invested in cash and are relying on interest to grow your savings, this will take a knock. Banks are likely to reduce their savings rates in line with the interest rate cut of 1%. What does this mean for the growth of your money? For every R100,000 sitting in cash, you will earn R1,000 less in interest per annum. This highlights the importance of having a diversified portfolio where you do have exposure to growth assets in order to ensure you do get real growth over the long-term, and only your emergency funds should be retained in a money market type account, which should allow for immediate access.
We recommend the Investec Private Banking CCM Money Market account, which we administer on behalf of Investec Private banking, allowing it to offer an extremely competitive rate, and is linked to the average of the top 4 qualifying money market accounts, while still allowing access to your funds within 48 hours.
The outlook for further cuts
Johann Els, head of economic research at Old Mutual, says South Africa’s GDP growth could go deeper into negative territory in 2020 than the -1.5% recorded in 2009 during the global financial crisis. “My preliminary, real GDP forecast is closer to -2.0% for 2020 with headline inflation forecast at 3.5% for 2020. That is significantly weaker than the Reserve Bank’s -0.2%.” He goes on to say, looking ahead, he believes there is room for more rate cuts over the next few quarters as inflation and growth will likely both surprise on the downside relative to the Bank’s forecasts.
Another rate cut may help counter the economic effects of the virus. The coronavirus has seen tremendous disruption in local & global economies, pockets of illiquidity, and stress selling. When markets are falling, in other words in a short-term downward move, you can look forward to buying a greater stake in your investment portfolio for the same rand contribution or investment, he says. This may lead to better investment returns in future because it may be a good time to invest.
If you are investing for retirement, it is for the long-term and therefore, the impact of any short-term shocks will likely be recovered, and we must not let fear take flight and let emotions get in the way of long-term investment success.