Picture this – you wake up and get your monthly payment reminder from your bank or credit provider on your phone – and the amount you owe is less than what you owed last month. 

Win! But why exactly are you being charged less for your loan repayments? 

Or (shudder) what if the amount in your notification is more than last month? That doesn’t sound fair! Why do you suddenly have to pay more?

It all has to do with interest rates. Before you groan and go back to scrolling on your phone, hear us out. We hear about interest rates so often that we practically have an allergy to them by now.

Turn on the news or the radio and someone will be talking about them. Today they’re going up, next month they’re going down. They seem to jump back and forth more than your little cousin’s Instagram and Tik Tok-addled attention span. 

Seriously, what’s the deal with the interest rates constantly swinging one way and then another?

Let’s take a closer look and demystify interest rates once and for all.

What is the Repo Rate?

The interest rates we get charged by banks and creditors are all impacted by the repo rate.

Hold up – what’s the repo rate?

The repo rate is the rate at which the South African Reserve Bank (SARB) lends money to all the major banks (yep, even banks need to borrow money). The rate at which banks borrow money from SARB affects the interest rate that banks charge us for borrowing money.

Think of the repo rate as a kind of financial G-force we’re all tied to – it’s neither good nor bad, it’s just there and it affects us all.

How does the Repo Rate affect interest rates?

So, we’ve established that the repo rate is the rate that SARB charges banks for borrowing money, which then directly impacts the interest rates banks and creditors charge us for borrowing money. But how exactly does this work?

What happens when the repo rate decreases?

If SARB chooses to decrease the repo rate, then it costs the banks less to borrow money to provide to the general public. This decreases the amount of interest you pay on a loan, which means you pay less on your monthly debts such as mortgage and vehicle monthly payments.  

This sounds great but remember that all interest rates are lowered – including the ones you earn, meaning you earn less interest on your savings and investments.  

Unless your savings are in an account with a fixed interest rate (meaning the interest rate never changes) you’ll be pocketing less at the end of the month. So, there are pros and cons.

What happens when the repo rate increases?

Conversely, if SARB decides to increase the repo rate, it will cost the bank more and you’ll pay more interest on your loans, bumping up your monthly repayments. 

Again, this isn’t fun if you have debts to repay but if you have savings in an account with a variable interest rate (meaning it can change) then you get to walk away with more savings in your pocket than before. 

A simple way to remember it is like this:

Repo rate decrease = interest rates decrease and less expensive repayments.

Repo rate increase = interest rates increase and more expensive repayments.

Why does the repo rate constantly change?

As confusing as it might seem, the repo rate constantly changing is ultimately a good thing for the economy and us. SARB changes the repo rate according to the needs of the economy. 

When the economy is struggling or in a recession, SARB will lower the repo rate, making our monthly loan and credit repayments lower, which eases everyone’s financial woes. 

Lower interest rates also mean people have more money to spend, which means other people earn more, and can then spend more (cue “The Circle of Life” music). This stimulates the economy, and everybody benefits. 

When the economy is thriving and lots of money is changing hands, it can push the prices of goods up – also known as inflation. If inflation gets too high, SARB will increase the repo rate to counteract its effects. 

The increase in the repo rate acts as a disincentive for banks to borrow from SARB, pushing up interest rates. With interest rates up again, people spend less, and this reduces the flow of money in the economy and drives prices back down again.

What’s it got to do with me?

If you have loans, you’re busy paying back you can breathe a sigh of relief when there’s an interest rate drop. Lower interest rates mean lower monthly debt repayments and more savings in your pocket.  

However, if you have a large amount of debt, it would be in your best interest to use those additional savings to pay off more of it. The sooner you pay it off, the less interest you pay overall, not just now. 

If you’ve ever wanted to open an investment or savings account with a variable interest rate, there’s never a better time to do it than after a repo rate hike. 

Those higher interest rates will translate into higher net savings for you each month (until the repo rate eventually drops again of course).

Conclusion

Phew! That was a lot. Hopefully, we didn’t lose your interest there (ba dum tisssss). 

Now that you’ve got a crash course in interest and repo rate fluctuations don’t hesitate to use your new knowledge to your advantage and make some smart fiscal decisions – and be that one person at the party who can unpack it all when someone brings it up. 

The content provided in this article is provided as general information. It is not intended as nor does it constitute financial, tax, legal, investment, or other advice. We accept no responsibility from any loss arising as a result of your reliance on information contained in this article, any related communication or on our app.