The impact of the reduced repo rate on home loan repayments
Category Market Advice
Amid countless set-backs that consumers face with the rising cost of living, there is a silver-lining that will see them save money and increase their buying power.
On March 28, The Monetary Policy Committee (MPC) of the SA Reserve Bank (SARB) cut the repo rate by 25 basis points from 6.75 percent to 6.50 percent. This drop will have various consequences for the housing market that will come to light in the months to come.
What is the repo rate?
The South African economy is regulated by SARB, the central bank of the country. Regulation takes place when it lends money to commercial banks at a fixed interest rate, which is in financial terms, known as the repo rate. This rate affects the way commercial banks charge, us, the consumers, for a number of financial lending services. The repo rate has two integral roles in the economy, firstly, its safeguards the country against counter inflation, and secondly, it prevents excessive, and at times, irresponsible bank lending. A rise or drop in the repo rate will directly affect consumer buying power and the rate at which prices for goods and services increase (inflation).
What does this mean for the property market?
The current drop in the repo rate simply means that commercial banks, such as ABSA and FNB, are borrowing more money from SARB at a reduced interest rate. This reduction has, in-turn, decreased lending rates for consumers, making it more affordable to pay-off home loans.
This will positively affect home buyers in two distinct ways. Primarily, existing home buyers will now find it easier to pay off their home loan as the reduced interest rate will see them paying less in monthly installments or they can continue paying the previous rate (before the repo rate drop) in-order to pay-off their home loan quicker. Either way, home buyers will save.
Secondly, the general consensus among real estate professionals in the industry and financial institutions is that the increased affordability of home loan repayments will incentivise many new and cautious home buyers into entering the property market. In particular, Rhys Dyer from Ooba, which is the country’s biggest bond originator, explained to local media that the reduced interest rate is expected to stimulate the residential housing market as a heightened number of people secure home loans for their first home.
How much are you really saving?
It is important to understand how the 25 basis points reduction will affect your wallet so you can get a clear idea of your savings each month and ultimately, in the long-term. As an example, if your home loan is R1 million over a 20 year period, the reduced repo rate will allow you to save R39 900 over this period or R166 each month.
De Lucia Group is optimistic about the reduced repo rate especially since more people now have the opportunity to buy their dream home, and in the process, pay off their home loan quicker and save money.
The new repo rate will rejuvenate the housing market as new home buyers are expected to capitalise on the favourable economic conditions. Existing bondholders will also receive much needed relief as their repayments are now reduced. Overall, it will be interesting to see how the market responds to these changes in the upcoming months and whether or not more people, are in fact, encouraged to invest in a home they have always dreamed of.
Author: De Lucia Group
