Banks have put the brakes on runaway interest rates giving you a breathing space which you should use to cut down debt. All the major banks yesterday cut their prime rate, the rate at which they lend to their best customers, by one percentage point from 25,5 percent to 24,5 percent.
Standard Bank and Absa also cut their home loan rates. Standard lowered its home loan rate by one percentage point and Absa by a 0,5 percentage point, bringing the new rate at both banks to 23 percent.
If you have a R200 000 home loan over 20 years at Standard Bank, you will now be paying R3 874 a month instead of R4 034. This puts R160 a month more in your pocket. If you have a R200 000 loan over 20 years with Absa, instead of paying R3 954 a month, you will now pay R3 874 a saving of just over R80 a month.
But dont see this saving as a signal to spend more money, or to borrow more.
Remember that interest rates are likely to remain volatile for quite a while and you could easily find yourself drowning in debt next time there is a movement upwards.
Rates are still at record levels and will take time to come down to the level they were at even a year ago, when home loan rates were about 19 percent and prime overdraft rates about 19,25 percent.
So, if you can keep on track by maintaining your current monthly home loan repayment you can save thousands of rands in interest in the long run.
For instance, if you continue to pay the monthly instalment of R4 034 on your R200000 bond instead of pocketing the extra R160 a month, you will save R292 826 and shave nearly seven years off your loan period.
If you have an overdraft, try to use the money you will be saving in interest to pay off your debt as quickly as possible. And when you have done this, try not to run up debt in the future.
The cut in prime rates is likely to filter through to credit cards too because banks base interest on these cards on the prime rate. Credit card debt is some of the most expensive debt you can get, with most people paying prime plus three to five percent, so you might consider consolidating your credit card debt and overdraft into your home loan.
And remember that it is extremely important that you pay off the entire amount that you owe on your credit card each month. If you dont you are whacked with interest on the entire debit balance from the date of the statement on which your purchases first appear.
This means you will have to fork out about R80 every month if you have R3 000 outstanding on your credit card at an interest rate of 32 percent.
The maximum interest rate that banks can charge on your credit card and on your overdraft, according to the Usury Act, is 33 percent a year.
To work out how you will be affected by the interest rate cut, use our new home loan calculator.