Interest Rate Lowest in 30 Years

The Reserve Bank's Monetary Policy Committee has decided to reduce the repurchase rate by 50 basis points to 5.5% per annum with effect from 19 November 2010. This action is viewed to be consistent with the continued attainment of the inflation target. The scope for further downward movement, however, is seen to be limited given the signs of recovery in household consumption expenditure and credit extension.

On the back of this latest cut in the repo rate, the lending rates to the public, i.e. prime and variable mortgage rates, will decline by the same magnitude to a level of 9%, effective from 19 November 2010. The Repo rate (repurchase rate) is the rate at which the reserve bank lends Rands to our local banks. This rate is usually 3.5% lower than the current prime rate.

Although a drop of 0.5% could translate to a huge saving over the full term of a bond, be careful of the interest rate cycle. What goes down must come up! In fact, this would be a great opportunity to maintain paying off your debt at the current higher interest rate of 9.5% or even increase it! The average interest rate in SA since 1948 is 14.5%. If one could lock in at this rate, you would effectively never have to wrestle with your budget again when the interest rates are increased.

Beside the peace of mind of knowing how your bond repayments will now affect your every year net income, you could in effect also pay off your bond in a much shorter period.

In comparison to renting a property with its annual increases, your bond repayment should effectively decrease yearly as a % of your annual income.

YR 2010 / Net monthly Income R40 000 / Bond Repayment R12 799.26 / Income to Bond Repayment 32.00%
YR 2010 / Net monthly Income R44 000 / Bond Repayment R12 799.26 / Income to Bond Repayment 29.09%
YR 2010 / Net monthly Income R48 400 / Bond Repayment R12 799.26 / Income to Bond Repayment 26.44%

Find out how any additional repayments could assist you with your financial self-determination.
Read the full statement issued by Gill Marcus.

Silke Financial Services has the expertise to advise on investment strategies to suit investor circumstances, preferences and time horizons.