Do you understand interest rates?
When it comes to interest rates, it’s important for property owners to understand the difference between prime lending and repo rates. Once you know more about these concepts, you’ll be able to gain insight into how they affect the property market. Read our blog post to learn more about these key concepts. You can browse through GotProperty to find great houses for sale.
South African Reserve Bank
The South African Reserve Bank is responsible for safeguarding the value of our currency and they play a role in maintaining a stable economy. The Reserve Bank also contributes to economic growth in South Africa. In order to fulfil its purpose, it needs to be able to impact the number of people who spend their cash as well as the number of people who put their funds into saving. Changing the interest rates is an easy way for the Reserve Bank to have an influence on spending and saving.
When the interest rates are raised, taking out loans are costlier. This reduces the number of people who go into debt and it also decreases large investments. The result is a decrease in the cash that circulates the South African economy, stunting inflation and promoting stability. Decreased interest rates make taking out a loan more affordable, which promotes investment and helps to accelerate a stagnant economy. The Reserve Bank uses the repo rate to have an impact on the interest rates from a distance.
Interest rates explained
Interest rates can be explained as the expense that is associated with borrowing money from a financial institution. When a bank lends you money, they charge you a percentage of the loan that you need to repay on a monthly basis. This percentage is referred to as the interest rate.
Repo rate explained
The repo rate refers to the interest rates that commercial financial institutions are charged when the Reserve Bank lends them money. A change in the repo rate makes it more or less affordable to obtain financial support from the Reserve Bank. This rate influences the affordability of taking out a loan with commercial banks.
Prime lending rate explained
The prime lending rate is the starting point that commercial banks use to calculate interest rates for their customers. The repo rate is marked up to include the financial institution’s profit margin, which becomes the prime lending rate. The prime lending rate forms the basis of interest for loans, which is then adjusted according to the risk profile of each customer. High-risk customers will pay more to borrow money as the bank needs an increased profit margin to accommodate loans that come with higher liability.
As a homeowner, it’s important to understand how the repo rate and prime lending rate impact your investment. Bond interest rates are typically not a fixed amount as they’re made up of the prime lending rate plus an additional percentage. This makes it possible for the commercial bank who is lending you the money to maintain their profit margin even when the prime rate fluctuates. What this means for your finances is that when the repo rate increases, you can expect an increase in your bond repayments. However, when there is a decrease in the repo rate, your bond repayments will be lowered accordingly.
The prime lending and repo rate also impact the property market. When interest rates are high, the number of people who can afford to buy property decreases. There is less demand for properties and price growth is stunted. If you have cash available to invest in property, this is the time when you can find bargains. Low-interest rates increase the number of people who can afford to buy property. This creates a higher demand for houses.
Now that you know more about interest rates, you can find property for sale on GotProperty.