The South African Reserve Bank (SARB) cut interest rates by another ,25% on Thursday which is brings the total reduction in interest to 3% for 2020. The repo rate which is applied to banks is now 3,5% and prime lending rate applied to consumers is now 7%. The lowest in 4 decades.

So how does this affect us?

Great news for indebted households –  3% off debt costs is a significant reduction in living expenses: A mortgage bond of R 1 000 000 at the beginning of the year had a monthly instalment of R9 650 per month when the prime lending rate was 10%. After the additional rate cut on Wednesday the same bond now costs R7 752. That reduces the debt by R1 898 per month.

Add to this the savings on other forms of debt such as overdrafts, credit cards and car instalments household living expenses should be far better off. 

Sad news for pensioners – It’s a case of ‘one man’s meat is another’s poison’, for those households which depend on interest bearing savings for an income. A pensioner with R 1 000 000 savings is now earning R2 500 less.

What you could do – Paying off your debt with the savings is an ideal plan for those whose income was not affected by the COVID 19 lockdown. Not many South Africans are in this position but even if you can allocate a small amount to paying off your debt more quickly this will pay dividends in the future. 

Pensioners could look to Unit Trust Income Funds which focus on investing in cautious assets such as bonds and cash. When interest rates go down bonds tend to go up. Be aware of the fees that are applied as your return is net after costs. RSA Retail Bonds may also be an option with no fees at the current top rate of 8%.

The saving grace for us all is that inflation is way down to 2,1% – the lowest in decades which is a direct reflection on how the lockdown has affected the economy. We should brace ourselves taking every opportunity as we navigate through the devastation of this pandemic on the global economy.