End of an era for home loans in South Africa

South Africa’s shift away from the prime lending rate, as proposed by the Reserve Bank, will have notable implications for lenders and borrowers alike.

While the shift is unlikely to affect borrowing costs in practice, it may change how those costs are presented and understood, depending on the costs, a funder’s risk appetite, or a borrower’s risk.

Law firm Cliffe Dekker Hofmeyr’s Michael Bailey and Sthembiso Chauke said clients engaging in new lending, refinancings, or portfolio reviews should factor this trajectory into their documentation, pricing strategy and long-term planning.

This comes after the South African Reserve Bank (SARB), in a February 2026 consultation paper, proposed replacing the prime lending rate with its policy rate (the repo rate) as the primary reference point for loan pricing.

Bailey and Chauke explained that the prime lending rate has long occupied a central, though highly misunderstood, position in South Africa’s lending landscape.

“Although it is widely perceived as the baseline for loan pricing for home loans, car loans and other credit transactions, its role has long been administrative rather than economic,” they said. 

Since 2001, the prime rate has been set at a fixed spread above the repo rate – specifically, 350 basis points higher – and served as a convenient reference point.

However, this is where its role ends, as the prime lending rate does not necessarily reflect funding costs, a funder’s risk appetite, or borrower risk.

Bailey and Chauke said this disconnect has created a persistent misunderstanding, as the prime rate is often viewed as the starting point for negotiating lending rates.

Many assume that the prime rate’s fixed spread above the repo rate reflects lender margins. However, this is not the case.

In reality, lending rates are determined independently, based on a combination of funding conditions, risk assessment and commercial considerations.

The prime rate merely serves as a quoting convention, Bailey and Chauke said, with no requirement for lenders to quote loans using this rate. 

The SARB’s consultation paper said this disconnect has become increasingly problematic, as it obscures how monetary policy decisions flow through to borrowing costs and undermines transparency in the pricing of credit.

Therefore, the Reserve Bank has proposed doing away with the prime rate and instead using the repo or policy rate as the reference rate for lending.

What this will look like

Bailey and Chauke explained that, under the Reserve Bank’s proposed approach, loans would be priced directly as a spread above the repo rate, rather than as a margin relative to the prime rate.

They emphasised that, from a pricing perspective, nothing will change. “The existing fixed relationship between the two rates would be preserved through an equivalent spread,” they said.

For example, whereas a loan would normally have been priced at prime+3%, under the new approach, it would be priced at repo+6.5%.

This, Bailey and Chauke explained, will ensure continuity and avoid any unintended transfer of economic value between lenders and borrowers.

“The difference lies in transparency: the repo rate would be clearly identified as the anchor, with the lender’s margin explicitly reflecting risk and funding considerations,” they said.

However, while this shift may not change much in terms of pricing, it is not without complexity.

This is because the prime rate is deeply embedded in South Africa’s financial system, with millions of existing contracts referencing this rate.

This includes agreements like mortgages, vehicle finance, personal loans and commercial facilities. 

The Reserve Bank has estimated that prime rate‑linked contracts exceed 12 million, with a value of around R3 trillion.

Therefore, the bank’s consultation paper recommended a gradual transition away from the prime rate.

This transition will include enhancing fallback language in new prime rate‑linked contracts, issuing new contracts that reference the repo rate directly, and developing mechanisms to transition legacy contracts over time. 

“To minimise disruption, fallback spreads would replicate the existing prime‑to‑policy‑rate relationship,” Bailey and Chauke explained.

“Given the operational and legal challenges of amending large volumes of retail contracts, the SARB also anticipates legislative support in the form of safe‑harbour provisions to facilitate the transition and reduce litigation risk.”

This also means South Africa will not see an immediate move away from the prime rate, with 2027 identified as the earliest realistic start date.

What lenders and borrowers need to know

In the meantime, Bailey and Chauke outlined several implications of the eventual transition that lenders and borrowers should take note of.

For lenders, they said it is important to note that the SARB’s proposal is a clear signal to begin assessing prime rate-linked exposure across loan books, systems and documentation.

“Since it may not be practical to amend existing prime rate-linked loans, there may be changes to legislation that facilitate the transition and minimise legal costs for lenders and borrowers,” they said.

Lenders should also note the need to incorporate appropriate fallback language upon the cessation of the prime rate in any new prime rate-linked loans provided to clients.

For borrowers, Bailey and Chauke reiterated that the move away from prime is unlikely to affect borrowing costs in practice.

However, they said it may change how those costs are presented and understood, depending on the costs, a funder’s risk appetite, or borrower risk.

“More broadly, the consultation paper highlights the direction of travel in South Africa’s broader benchmark reform agenda: fewer legacy reference rates, greater transparency, and a closer alignment between monetary policy and market pricing,” they said. 

“Clients engaging in new lending, refinancings, or portfolio reviews should factor this trajectory into their documentation, pricing strategy and long-term planning.”