R258 per month relief for South African homeowners expected

South African homeowners can expect their monthly home loan repayments to come down later this month as the Reserve Bank is set to enter a cutting cycle. 

With a 25 basis points cut, the average home loan repayment on a R1.5 million mortgage will decline by around R258 per month. 

While this relief is much needed, it is still relatively insignificant considering how high interest rates are compared to November 2021, when the Reserve Bank began hiking rates. 

To tame inflation, the bank raised interest rates a cumulative 475 basis points from the end of 2021 and kept rates at a 15-year high over the past 14 months. 

As inflation has moderated towards the midpoint of the bank’s 4% to 6% target range, analysts and economists have said it can begin cutting interest rates. 

Old Mutual Wealth investment strategist Izak Odendaal said the Reserve Bank’s Monetary Policy Committee (MPC) members can start cutting already if they skate to where the puck is going.

Alongside a moderation in inflation, the rand has traded stronger versus the dollar. This is important because one of the factors influencing the Reserve Bank is whether an interest rate cut would weaken the rand and potentially reignite inflation. 

This is unlikely to happen because South African assets are in a much stronger position now than they were a few months ago when the country was plagued by political uncertainty. 

The formation of the Government of National Unity (GNU) has boosted the rand by boosting investor sentiment towards South Africa. 

Furthermore, the US Federal Reserve is likely to begin its cutting cycle this month, meaning the differential in rates between South Africa and the US is unlikely to change. 

If there is a divergence in interest rates between South Africa and other major economies, notably the US, it can result in rare weakness as capital tends to flow to where risk-adjusted returns are highest. 

However, this concern has largely dissipated as inflation in the US moderates and its economy slows, pushing the Federal Reserve to begin cutting rates. 

The MPC is most likely to cut interest rates by 25 basis points later this month, kickstarting its cutting cycle without cutting rates too deeply and potentially reigniting inflation. 

There is also an outside chance that rates will be cut by 50 basis points due to lower-than-expected inflation in August. 

This is unlikely as inflation remains above the midpoint of the Reserve Bank’s target range, albeit by a small amount. 

A 25 basis point cut will result in significant relief for South African households and free up disposable income to be spent in other areas of the economy. 

Standard Bank estimates a 25 basis point cut will free up R4 billion for consumers to spend, greatly boosting the local economy.

If the Reserve Bank cuts interest rates by 25 basis points next month, repayments on a R1 million home loan will come down by R172 per month. 

This benefit grows substantially for larger loans. For example, repayments on a R5 million home loan will come down by R861 per month. 

Below is a table outlining how much South African homeowners can expect to save on a standard 20-year home loan following a 25 basis point interest rate cut. 

Home Loan Value	Current Payment	New Payment	Savings
R 1,000,000.00	R10,837.07	R10,664.82	R172.26
R 2,000,000.00	R21,674.14	R21,329.63	R344.51
R 3,000,000.00	R32,511.21	R31,994.45	R516.77
R 4,000,000.00	R43,348.28	R42,659.26	R689.02
R 5,000,000.00	R54,185.35	R53,324.08	R861.28
R 6,000,000.00	R65,022.42	R63,988.89	R1,033.53
R 7,000,000.00	R75,859.49	R74,653.71	R1,205.79
R 8,000,000.00	R86,696.57	R85,318.53	R1,378.04
R 9,000,000.00	R97,533.64	R95,983.35	R1,550.30
R 10,000,000.00	R108,370.71	R106,648.16	R1,722.55