21 November 2024

The South African Reserve Bank (SARB) has just announced another 25-basis-point cut in the interest rate, bringing the prime lending rate to 11.25%. This reduction may seem modest, but experts say it’s a tangible step towards making debt more manageable for South Africans – a welcome relief as the festive season approaches. 

To unpack the potential impacts of this decision on the property market and consumer behaviour, Leonard Kondowe, Rawson Finance’s National Manager, shares his insights on the matter.

A move shaped by inflation and global trends

“Inflation remains the biggest consideration in interest rate decisions,” Kondowe acknowledges, noting that the SARB’s goal is to maintain inflation within its target range while also keeping South Africa appealing as an investment destination. 

Fuel prices, exchange rates, and even global political and economic factors like tensions in the oil producing regions also play into the SARB's decision-making. 

“For now, inflation has been within the SARB’s acceptable range,” he says, “and there’s a general sentiment of market positivity, though it’s always hard to predict how long these favourable conditions might last.”

Kondowe highlights that South Africa’s interest rate trends often follow those of larger economies, particularly the United States. With global markets taking a conservative approach recently, the SARB’s cut aligns with cautious optimism.

What the rate cut means for consumers’ wallets

The impact of a rate reduction reaches deep into the financial lives of South Africans. For those with home loans, vehicle finance, and other credit commitments, this cut will ease monthly repayments, offering some relief on debt-related expenses. However, Kondowe urges consumers to avoid the temptation to splurge with the extra disposable income.

“Instead, stick to your current repayment amounts if possible, to pay off debts faster,” he suggests. “This approach not only builds financial security but also reduces the total interest you pay over time – a benefit that compounds considerably over the life of a typical home loan.”

Looking toward early 2025, Kondowe is cautiously optimistic about consumer confidence. 

“We’re definitely seeing signs that people are becoming more confident about investing in the future,” he notes. “At Rawson Finance, we’ve just had a record high in bond applications, and we fully expect this trend to continue as the summer season gets properly underway.”

Advice for homeowners: Stay focused on financial stability

Homeowners with prime-linked bonds will see a slight reduction in their monthly repayments thanks to the rate cut. Any other debts should also see a corresponding downward adjustment. Kondowe advises using any additional disposable income resulting from these expense reductions to reduce overall debt rather than accumulating more. 

“Put any spare money into your bond,” he suggests, explaining that this behaviour will not only reduce the overall cost of the loan but also build equity. 

“Equity in your access bond serves as a valuable financial buffer that can be withdrawn if necessary to cover unexpected expenses,” he continues. “In the meantime, that money is working as hard as it possibly can for you, generally saving you far more than you could earn by investing it elsewhere.”

For new buyers, Kondowe emphasises the importance of understanding one’s financial position and getting prequalified for a bond. This, he says, gives buyers a realistic picture of their financial position, including income and expenses, and how this impacts their affordability.

“Remember, just because you qualify for a certain amount doesn’t mean you should necessarily borrow up to that limit,” he cautions. Instead, he says first-time buyers should prioritise building a manageable budget, taking into account all other financial obligations, lifestyle considerations and future goals.

A boost to the property market and buyer activity

Historically, lower interest rates have fuelled increased activity in the property market, and Kondowe expects this time to be no different. With a slightly reduced cost of borrowing, more potential buyers could now qualify for bonds, and some may even consider moving from renting to owning. 

“As affordability improves, so does the appeal of homeownership, especially for renters who may find property purchases make a lot of financial sense,” he explains.

He also notes that with improved affordability, loan default rates may decrease, which can have a stabilising effect on the economy and help households achieve greater financial resilience. 

“It’s a win-win,” he says, “for the market as a whole and for consumers’ individual finances.”

Selling in a changing market

For sellers, Kondowe advises a careful approach. 

“Overpricing is a common pitfall,” he warns. “A property that’s priced too high often lingers on the market and can deter serious buyers.” 

He recommends consulting reputable agents who can provide accurate market valuations. Sellers should weigh their decision carefully and rely on professional advice rather than attempting to time the market. Every seller’s decision to list will depend on personal circumstances, and Kondowe stresses that it’s essential to get tailored advice. 

“There’s no one-size-fits-all rule here. Each decision to sell should be based on thorough analysis and professional guidance,” he says.

Final financial tips for South Africans

In light of the rate cut, Kondowe has some parting advice for managing debt and savings. 

“Firstly, if you’re facing financial difficulties, don’t be afraid to reach out to your bank,” he encourages. “Lenders are often open to finding compromises to support bondholders who are under strain. Even if you’re not in financial crisis, it’s a good idea to keep a close watch on your credit profile and financial position to avoid misjudging affordability and getting into trouble.”

For South Africans eager to use this rate cut to their advantage, Kondowe advises actively managing debt and staying informed about your financial health. 

“Ultimately, this 25-basis-point reduction is a small but significant step towards helping consumers and the property market move toward a more stable and prosperous future,” he says. “Whether you’re a buyer, homeowner, or seller, this rate adjustment is an opportunity to plan wisely and take advantage of a slightly less strained economic environment.”