The South African Reserve Bank has announced an increase in the Repo Rate, effective as of the 24^th of July 2015, from 5.75% to 6% per annum. This automatically affects the Prime Interest rate, which will increase from 9.25% to 9.5% per annum. In turn, this will affect the majority of home-owners who still have outstanding bonds, as most of these bonds are linked to the Prime Interest rate. For these home-owners, when the Prime Rate increases, the interest being charged on their outstanding balance also increases, and therefore the monthly instalment owing increases. A glimmer of good news is that this increase doesn’t generally impact Personal Loans, as these are usually granted at a fixed Interest Rate.
To break this down to real figures, let’s consider a Home Loan with an outstanding balance of R800 000, granted at Prime + 3%, and with 15 years of instalments still owing. Before the increase, the monthly instalment on this Home Loan would have been around R9 735.00 monthly (excluding insurance premiums). The increased interest rate will result in this instalment increasing to around R9 865.00 monthly.
That difference of R130.00 monthly may not sound like much, but to a family for whom every month is a real struggle to make ends meet, and when considered with increased vehicle repayments (which are often also linked to the Prime Rate), ongoing inflation, a weak Rand (resulting in more expensive imported goods and petrol), and other increasing costs (education fees, public transport, etc.), it may not take a very big straw to break the camel’s back.