Repo rate cut: Be cautious with extra cash in your pocket

The Reserve Bank last week announced its decision to cut the repo rate by 25 basis points, bringing it to 7.25%. Lower interest rates mean that, if you have a bond or car finance, for example, you will now have reduced monthly repayments.

What this translates to is having more money in your pocket. The extra cash can go into your savings or towards clearing your debt.

It is advisable to keep paying the same amount on your monthly repayments.

For example, if your bond repayment was R7,748.79 in June 2024, the repo rate cuts over the past few months mean that now you're paying R7,290.12. This leaves you with an extra R458.67. What will you do with it?

If you can afford to, financial advisers say, you should always pay more than what you're supposed to on monthly repayments. This will help you clear your debt quicker and save you a lot of money, which would have gone to interest.

“The outlook for consumers is improving and the 25 basis points rate cut bodes well for South African households and general sentiment, but it’s not a magic wand that will suddenly change the financial position for most people,” says Risks of Atlas Finance director Niresh Gopichand.

However, he says, despite the repo rate being reduced, South Africans are still experiencing a decline in actual take-home pay and consumers are still feeling the economic squeeze. The latest BankservAfrica Take-home Pay Index showed that “the average nominal take-home pay declined by 2.0% month on month to R17,495 in April, compared to R17,846 in March, Atlas Finance has reiterated the imperative of responsible borrowing”.

Says Gopichand: “Yet, salary earners should remain cautious. While annual take-home pay may have shown an increase, the combination of unchanged tax brackets and inflation-driven salary increases may push earners into a higher tax bracket, thus negating the benefit of a salary increase.

“Much is made about the improvement in finances and sentiment following interest rate cuts, but the reality for many is that the real decline in take-home pay negates the benefit of the 25-basis-point reduction. If we had to give one word of advice, it would be caution.”

Gopichand gives guidelines for consumers:

• Be cautious when considering how to best use the extra cash, thanks to the interest rate cut: Instead of spending it on luxuries and nice-to-haves, channel it to a savings account or use it to pay down debt.
• Continue to budget with caution in mind: Stick to a budget that tracks household income and expenses and identify where spending can be reduced.
• Be cautious when applying for new debt: Be mindful of the temptation to take on new debt, as there is no guarantee that interest rates will continue at this level. Yet, there is a silver lining of lower repayments for those who do need to take out new debt – just make sure it is incurred in a responsible manner and for the right reasons.
• Caution against overspending: Don’t be tempted to spend more just because your payments seem lower.

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