Rate hikes effect your debt

How does the repo rate increase affect you?

Posted  February 16, 2014

The media was abuzz last week when Reserve Bank Governor Gill Marcus announced that the repo rate would increase to 5.5% But what exactly does it mean when the repo rate goes up? How does it affect you, the average citizen fighting the battle of the budget every month? 

In a nutshell, when the repo rate goes up the interest charged on your credit also increases. So you can expect debt such as your home loan, vehicle finance, personal loans and credit cards to get more expensive. This means that South Africans around the country will have to tighten their belts and rein in their spending to compensate for increases in bond repayments, car loans etc.

Another smart move would be to prioritise your debts and try to pay off the higher interest-bearing debts such as credit and store cards as quickly as possible.

A word of caution. If you find that the rate increase or future increases down the line impact your ability to meet your debt repayments, contact your creditor immediately and make alternative payment arrangements. Do not wait for irate phone calls or letters from lawyers!

On a brighter note, the rate increase is good news if you are saving money or a pensioner with retirement savings. For the lucky few who have little debt to worry about, now would be a good time to channel more money into savings plans as you will be earning a higher, more favourable interest rate.

A practical exampleIf you had a home loan of R1 million at an interest rate of prime plus 2, this would mean your interest was calculated at 10.5% and your monthly payment was R9 983,80. However, after the rate increase announced last month, your interest will now be calculated at 11% and your monthly payment will increase to R10 321,88. That’s an extra R338.08 out of your budget.

If you had a car loan of R300 000 taken over 54 months at an interest rate of prime plus 2, your monthly payment would have been R6 995 before the rate increase. However, you will now have to pay R7 069 which is another R74 out of your budget. So, your car installment and home loan will now cost you R412 more.

An interest rate increase can mean good or bad news, depending on your point of view. Practicing good financial habits could mean the difference between a slight adjustment to your lifestyle and a frantic scramble to make ends meet

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