Higher interest rates could benefit savers
The repo rate is the rate that the Reserve Bank charges on money that banks borrow from it through the refinancing system and the higher the repo rate, the higher interest rate the banks pay and this of course, is passed on to consumers.
Thus, there is no benefit for banks when interest rates rise. Higher interest rates are intended to discourage borrowing and encourage saving, which usually results in lower inflation because demand for goods and services declines as people buy less on credit, and supply increases if additional savings are used productively in the economy.
A homeowner with a bond of R500 000 is paying an extra R1000 per month on his or her home loan as a result of interest rate hikes in the past year. The benefit goes to the savers. Most banks’ net interest income declines when interest rates rise and their net interest income increases when the interest rate declines. When the repo rate is increased and the market reacts accordingly, eventually all borrowers in the economy are penalised by having to pay higher rates on their loans. At the same time, earning higher rates on their investments, rewards savers.
The best advice is to pay off your mortgage loan as quickly as possible and when the interest rate declines, keep your payments the same. This way you will pay off your home loan faster, and should interest rates rise again – which usually happens – you won’t struggle to adapt to higher payments.
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