Interest rates for dummies

Repo rate vs prime lending rate explained

Expert provides assistance to homeowners wanting to work out what they are likely to be paying on their bonds and plan for the future

HOMEOWNERS and buyers are continually being urged to manage their budgets, especially as interest rates are on the increase. But for many who eagerly watch the rate changes following the Monetary Police Committee’s meetings every second month, there may be some confusion about which rate they should actually be focusing on.

Is it the repo rate that South African Reserve Bank (SARB) governor Lesetja Kganyago talks about in his addresses or the prime lending rate that banks and economists use to explain how home loan repayments will be affected? How are they related and which will help homeowners plan their bond repayments?

The technical answer is both, as the repo rate – the rate at which the SARB lends money to the commercial banks – dictates the prime lending rate – the rate that consumers are charged when borrowing money. But, as FNB property economist John Loos explains, homeowners can make their lives easier by monitoring the latter.

“The prime lending rates of the major banks are almost always set at 3.5% above the repo rate. It does not have to be this way but has been for over 20 years. So, when the repo rate goes up or down, the prime lending rate, which in turn affects consumers directly, does too.”

There are a few days’ lag between the repo rate adjustments and the corresponding adjustments in prime by commercial banks, he adds.

“As a homeowner you can watch both rates in tandem, but your home loan repayment will ultimately be affected by the change in your bank’s prime lending rate, if your floating interest rate is linked to prime.”

The current prime lending rate is 7.75%, and FNB predicts that this rate will increase by 0.25% after each of the four Monetary Police Committee meetings left this year. This would make the prime lending rate 8.75% by the end of this year.

UNDERSTANDING what you could be paying on your bond over the next while can prevent nasty surprises. PICTURE: RODNAE PRODUCTIONS/PEXELS

To break it down, Loos says the bond repayment on a R1 million home is currently R8 209, but by the end of the year, based on a prime lending rate of 8.75%, this will have increased to R8 837 – meaning homeowners will be paying R628 more than they are paying now.

On a new 20-year, R2m home loan at prime lending rate, consumers currently paying R16 419 a month will pay an extra R1 255 a month by the end of this year, taking their repayments to R17 674, should the prime rate indeed rise to 8.75%.

FNB expects the interest rate to stabilise next year at 9.25%. This would mean that owners of a R1m home could be paying R9 159 on their bond each month at the end of next year, an increase of R950 a month from what they are paying now on a new 20-year home loan at prime rate.

Owners of a R2m home could pay R18 317 by the end of next year, an extra R1 898 a month, compared to what they are paying now on a new prime rate loan, should FNB’s forecast materialise.

“We also expect, in the current interest rate cycle, that the prime lending rate will remain at 9.25% at the end of 2024.”

To assist homeowners with planning, Loos prepared the table opposite to allow them to calculate what they are likely to pay at different interest rates over the next three years. He emphasises, however, that these figures are indicative, and there may be slight differences between the table and actual home loan payments depending on how a homeowner’s bank calculates the effective interest rate.