How rising interest rates could affect your finances

Just like in Nigeria, the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) on Thursday announced a hike in the repo rate by another 50 basis points (bps) to 4.75%, which is broadly in line with analysts’ expectations.

This brings the prime rate to 8.5%. In Nigeria, the rate fell from 11.5% to 13%.

| Central Bank of Nigeria

In November and then again in January and March of this year, the SARB raised the interest rate by 25 basis points (bps) each, in line with the aim of bringing it back to a pre-pandemic level of 6, 5% by the end of 2024.

The decision to increase the repo rate was mainly based on the fact that the inflation rate approached and reached the top of the inflation targeting range.

Reserve Bank of South Africa
| South African Reserve Bank

Let’s look at the issues from SA’s perspective. On Thursday, the Reserve Bank raised its headline inflation forecast for the year to 5.9% due to higher fuel and food prices – and Reserve Bank Governor Lesetja Kganyago said warned that risks to the inflation outlook were on the rise.

Higher rates will increase debt servicing costs

“Consumers with larger loans that are repaid over longer periods will see a bigger increase in their loan repayments,” says Steven Barker, head of day-to-day banking and cash lending at Standard Bank. “The increase in reimbursements will have a negative impact on the household budget, as the additional expenses must be taken care of and could lead to reductions in other expenses.”

For example, a mortgage of R1 million with an interest rate of 8.5% for a term of 20 years will cost, after the rate hike, an additional R308 per month. Similarly, for example, the monthly installment of a personal loan of around R100,000 over a period of five years will increase by around R30 per month.

“In an environment of rising interest rates, we expect consumers to be more cautious and considerate when taking out large loans like home loans,” Barker said.

Determine if taking out a loan is a good idea

Before opting for a personal loan in the current environment of rising interest rates, you should consider whether there are other, less expensive ways to borrow to finance your needs. “Ask yourself if the loan for a [desired] the purchase to be made can be deferred and can instead be made through savings, meaning a smaller loan will be required,” advises Barker. In this lending climate, he suggests considering the following before taking out a loan of any kind:

  • Leave some affordability in the monthly budget to accommodate further interest rate increases.
  • Don’t just focus on the monthly loan repayment, but also understand the total cost of the loan.
  • Try to reduce the repayment term as much as possible.

Consider debt consolidation

“When debts can be consolidated to reduce monthly repayments, it helps households better manage their monthly budget. If debt consolidation can help reduce overall interest, it will save money over time. Lengthening the term of debt repayment through debt consolidation should be avoided as it will increase the total interest cost over time,” notes Barker.

Count on debt before investing

The best course of action in a rising interest rate environment is to manage debt first. “Consumers have debt contracts for cars, credit cards, overdrafts, term and revolving loans where their payments go up and need to make sure they can meet their debt service obligations. In cases where their debt repayment is not increasing, they can increase their monthly payments to keep the principal amortized at the same rate instead of just paying the interest.

“Only when debt has been reduced to a manageable and comfortable range and a consumer has excess cash flow should they pursue investments that will provide them with higher returns and a level of optimal risk,” concludes Barker.

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