South Africa’s interest rates are the lowest they have been in 20 years. For consumers, this means that the cost of debt has become significantly cheaper, and repayments on the likes of bonds, vehicles, personal loans and other credit facilities are likely to be notably lower than they were prior to the rate cuts if these were linked to a variable interest rate.
“The low-interest-rate environment presents the perfect opportunity for consumers to pay off more of their outstanding debt faster and to reallocate their savings from the likes of lower bond instalments to higher interest-bearing debt to pay this down first. Right now, the cost savings on interest-bearing debt with a 2% drop in the interest rate are significant, and can go a long way in making a serious dent in your debt obligations if used strategically,” explains Gareth Levinsohn, Commercial Director of Shapiro Shaik Defries and Associates.
“If you can afford to do so, increase your monthly repayments or at the very least, maintain the same instalment amounts you were originally paying before the interest rates dropped. This will have the effect of directly reducing the capital amount, so you not only pay off your debt faster but also save significantly on the interest component of your outstanding debt.
“Similarly, if you are going to make lower payments adjusted to the repo rate on the likes of your bond, then use what you are saving on the new reduced bond instalment to pay off higher interest-bearing debt first, such as your credit cards and any unsecured loans. The window of opportunity is now since interest rates are variable and these can go up again anytime. Once you have paid down your debts in this manner, allocate the instalments you would have made to debt repayments to a savings account or investment vehicle for greater future financial security,” he adds.
Levinsohn adds that many people underestimate the impact that even modest increases in debt repayments can make in the long term and bigger picture. SSDA provides the following examples to illustrate the impact:
|Home loan of R1.5million||Monthly instalment||Home loan of R3million||Monthly instalment|
|Repayment at 9% interest||R13 495||Repayment at 9% interest||R26 991|
|Repayment at 7% interest||R11 629||Repayment at 7% interest||R23 258|
|Monthly saving||R 1 866||Monthly saving||R3 733|
|If payments are maintained at R13 495||Bond paid off 60 months earlier on a 20-year term||If payments are maintained at R26 991||Bond paid off 60 months earlier on a 20-year term|
|Savings on the reduced bond repayment term||R366 028||Savings on the reduced bond repayment term||R732 194|
If these savings are allocated to paying down credit card debt
|Credit card debt of R30k||Monthly instalment||Credit card debt of R50k||Monthly instalment|
|Repayment over 12 months at 12.66%||R2 674||Repayment over 12 months at 12.66%||R4 457|
|If payments are maintained at R2 674 plus bond savings of R1 866 are allocated = R4540||Credit card paid off in 6.6 months as opposed to 12 months||If payments are maintained at R4 457 plus bond savings of R3733 are added = R8 190||Credit card paid off in 6.1 months as opposed to 12 months|
If you have credit cards or loans from different banks, check the interest rates across all of them as they may differ, and start by paying extra into the ones with the higher rates. As you pay a one-off, then reallocate the additional payments to the next one and so on.
“Middle-class South Africans are struggling under the burden of debt, and the COVID-19 environment is adding more pressure with job redundancies, wage freezes and lack of bonuses as a business struggle to maintain liquidity. The coming months are likely to be more challenging, so if you have the means, take advantage of the lower interest rates and maintain or increase your repayments if possible. Paying your debt down faster now means you will be setting yourself up to navigate the months ahead from a more secure financial base,” concludes Levinsohn.