How to capitalise on a lower interest rate | Advice

With the interest rate having been lowered by 25 basis points, those paying off a bond can take advantage of this in a few ways.

On 18 July, The Monetary Policy Committee (MPC) announced that interest rates will be lowered by 25 basis points, dropping the prime lending rate to 10% and the repo rate drops to 6.5%. For homeowners who are still in the process of paying off their home loans, this translates into a monthly saving on their bond repayments. 

There are several things homeowners can do with the money they are saving on the monthly repayments on their home loan following the recent interest rate cut. Either they could choose to enjoy having the spare cash to spend each month, or they could redirect the money into the home loan or to pay off other debts.

Practical examples

To provide a few practical examples on what homeowners stand to save as a result of the interest rate cut, if the cut happened five years into your lending term on a R1 million loan taken over 20 years, you would end up saving roughly R136 p/m on your repayments. If you put this amount back into your home loan, this will save you roughly R30,000 in monthly repayments and shorten your lending term by five months.

However, if the interest rate cut happened when you had just five years left on your loan term, you would save roughly R56 p/m on your repayments. By putting this money back into your home loan, you will only save R985 in interest. In this case, it might be better to put the savings into another form of debt, such as a car repayment. If you borrow R200,000 from a bank for vehicle finance paid over five years at prime plus 2.5%, and you added the R56 to these monthly repayments, you would end up saving R1,284 in interest and reduce your vehicle finance loan period by one month.

Consequently, redirecting the money into your home loan is usually the smartest way to benefit from the lower interest rate unless you are near the end of your lending term. For roughly the first ten to fifteen years of a twenty-year loan term, homeowners are spending more on interest than they are on paying off the home loan capital. In the above example, for the first year of the loan term, more than R8,000 of the R9,650 monthly instalment goes towards paying off interest. In the second year, this drops to over R7,000 and so forth until eventually you reach a point where more of the monthly repayment goes towards covering the home loan capital than it does towards paying off the interest. When you reach this point, it is often better to put any extra money you might have into paying off other debts as this is likely to result in higher interest savings.