How the repo rate drop can make your life easier3rd Feb 2020
On 16 January 2020, the South African Reserve Bank’s monetary policy community announced its decision to cut the repo rate by 0.25% (from 6.5% to 6.25%). This decision came despite all but three of 24 economists surveyed by Reuters predicting that the repo rate would remain unchanged.
The decision has, for the most part, provided relief to South African home owners and investors, but it has also left many wondering why the decision was made, and exactly how it will affect the local community going forward.
The ‘why’ behind the repo rate cut
There are numerous possibilities as to why the SARB has reduced the repo rate at this particular time. The struggling South African economy and lack of investor confidence are likely to be at the top of the list.
‘The South African Reserve Bank’s decision to cut the policy rate came earlier than anticipated. The SARB assessed that the elevated domestic event risks, such as the February 2020 Budget Speech and Moody’s ratings decision, as well as renewed risks on the global front, have been outweighed by domestic inflation and the weak economic environment,’ said Siphamandla Mkhwanazi, a senior economist at FNB.
According to the Bureau for Economic Research’s Inflation Expectations Survey, the forecast of GDP growth for 2019 was lowered to 0.4% from 0.5%. The GDP predictions for both 2020 and 2021 have also decreased to 1.2% (from 1.4%) and 1.6% (from 1.7%), respectively. The results of this survey are said to have played a substantial role in the SARB’s decision regarding the repo rate.
There is no doubt that the SARB and the local government are banking on the lower rate attracting new buyers and investors, both locally and from around the globe, as well as enticing property developers to take advantage of the reduced prices and embark upon more projects. Most experts will agree that the rate cut is certain to improve investor confidence in the SA property market and lead to positive contributions to the economy as a result.
What the decline in repo rate means for buyers and investors
Deena Pitum, one of Jawitz Properties’ best-performing agents, broke down what the decrease in the repo rate would mean for property owners and investors who are still in the process of repaying their home loans.
‘On a loan amount of R1 million over a 20-year term at 9.75% (factoring in the 0.25% drop), home owners can expect their repayment to come down by R160 a month. Those repaying a loan amount of R2 million can expect to save double that at R320 per month, and those on a R3 million bond, triple that at R480 per month,’ she explains.
‘That might not sound like much. On a R1 million bond, for example, home owners can look forward to a yearly saving of R1,920, and R38,400 over the course of 20 years.’
The question then remains: what would happen if a home owner or investor opted to forfeit the opportunity to reduce their instalments, and continued forward with the same instalment in place?
‘In this instance, the home owner would save 11 months’ worth of repayments on their bond term, ultimately concluding their bond almost a full year earlier than anticipated,’ Deena says. This would amount to a total saving of R104,335 over the full period of the bond.
The future of the repo rate
Despite most individuals showing contentment regarding the repo rate cut, numerous insiders are insisting that it is not quite enough to yield noticeable results. These insiders assert that the SARB needs to consider future reductions in the rate in order to fully boost investor confidence and make much-needed improvements to the economy.
‘Consumers are under enormous pressure right now. A further rate cut will put some money back into household budgets and boost important economic sectors, including retail and housing,’ commented Samuel Seeff, the Seeff Property Group’s chairperson.
Financial and property experts, like Seeff, are calling for a further reduction of a minimum of 50 basis points within the course of the next few months. Whether the SARB will heed this request, only time will tell. The good news is that SA Reserve Bank governor, Lesetja Kganyago, has indeed hinted at more rate cuts set to be announced throughout the year.
Until that time, however, both local and international investors can take advantage of the decline in interest rates with the knowledge that there are likely to be more to come.