Make the rate cut work for you

The interest rate cut is an opportunity to get out of debt faster, and it should spur you to invest in equities to earn inflationbeating returns. reports

THE INTEREST rate cut by the South African Reserve Bank (Sarb) this week may put extra money in your pocket if you have debt or a mortgage bond. But, more significantly, it signals growth prospects for the economy and could even prompt you to find ways to improve your financial situation over the long term.

The Sarb’s monetary policy committee decided on Wednesday to cut the repo rate (the rate at which the Sarb lends money to the banks) by 25 basis points to 6.5%. The last cut, also by a quarter of a percentage point, was in July last year.

The commercial banks will follow suit by dropping their interest rates on both savings and debt.

Luigi Marinus, a portfolio manager at PPS Investments, says the rate cut offers welcome relief for South African consumers ahead of tomorrow’s onepercentage-point increase in the rate of value-added tax.

“Investors view the rate cut as

‘growth positive’ for the South African economy, which has experienced disappointing growth in recent years. The significant progress made within South Africa in this quarter bodes well for promising economic growth prospects,” Marinus says.

Herschel Jawitz, the chief executive of Jawitz Properties, welcomed the news. “With the latest inflation figures comfortably within the 3%-to-6% band and the downgrade risk from Moody’s avoided for now, the Reserve Bank needed to show consistency of policy,” he says.

Jawitz says that, according to the latest research from First National Bank, consumers are in a better financial position in terms of debt-to-income levels, and this will be further improved by the rate cut.

HOW TO USE THE RATE CUT TO YOUR ADVANTAGE

The two main ways in which you can use the rate cut as a stepping-stone to financial freedom are by paying your debts off quicker and by revisiting your investments.

With the repo rate dropping from 6.75% to 6.5%, the banks’ prime lending rate, which is also the home loan base rate, will drop from 10.25% to 10%. This will translate, for homeowners, into a saving of R151 a month on a 20-year home loan of R912 000 (the current average approved bond size), according to Rudi Botha, the chief executive of bond originator BetterBond. “The minimum repayment payment of R8 952 on such a loan will now drop to R8 801.”

The best way of using this extra amount is by maintaining your bond repayments at their current level. Botha says that, by doing this, the average homeowner stands to shorten his or her overall loan repayment period by 12 months – and save more than R73 000 on the total cost of his or her home.

Elize Botha, the managing director of Old Mutual Unit Trusts, says the rate cut is the perfect opportunity for South Africans caught in a debt trap to pay off their liabilities quicker.

Last year, the Old Mutual Savings and Investment Monitor reported that 16% of household income was going towards debt repayments, such as personal loans, store accounts and credit cards.

“It’s not possible for everyone to become wealthy, but it is possible for most of us to be financially free from debt. Despite how South Africans view their current financial situation, financial freedom and the security it brings is attainable by reducing your living expenses, eliminating loans and ensuring that your income is greater than your expenses,” she says. “People with outstanding loans should take the opportunity of the lower interest rates to pay back their debt as quickly as possible.”

A rate cut, says Elize Botha, also offers the perfect opportunity for firsttime investors saving money in a bank account to consider investing in a unit trust fund instead.

“While a reduction in the prime interest rate is good for the economy, it isn’t great for South Africans saving money in bank accounts. Consumers with savings in interest-bearing vehicles will earn a lower return on their hardearned cash.”

Long-term data compiled by the research team at Old Mutual Investment Group shows that it took 92 years to double the real value of a cash investment, based on historical average returns, whereas equities (shares in companies listed on the stock exchange) needed only nine years to do the same. Yet, according to the 2017 Old Mutual Savings and Investment Monitor, only 2% of South Africans are investing discretionary money in an equity-based investment vehicle.

“Cash is good for short-term needs and provides relative stability, but cash saved in a bank account or fixed deposit is seldom able to deliver real growth over the long term, as opposed to equities, which have proven to outpace inflation,” Elize Botha says.

Another benefit of unit trusts is the financial security they bring.

“Unit trusts are ring-fenced, meaning that contributions made by investors towards a unit trust remain separate from the unit trust company. Should there be issues with the financial stability of the institution, the investors’ money is protected, as it is held by an independent trustee.

“And unlike fixed deposits, investors can access money in a unit trust with only a day or two’s notice,” she adds.

martin.hesse@inl.co.za