By: Mashudu Lavhengwa, Junior Economist from Metropolitan

For the first time since July 2020, the South African Reserve Bank lowered interest rates by 25 basis points, providing some relief to consumers. As of 19 September, the repo rate dropped to 8%, reducing the prime lending rate to 11.5%.

While a 25-basis-point cut may seem small, Mashudu Lavhengwa, Junior Economist from Metropolitan explains that it can have a noticeable impact, particularly for those with significant debt. “For homeowners with variable-rate mortgages, this cut will reduce interest, resulting in meaningful savings over the life of the loan. Consumers with linked rate car finance or personal loans will also pay slightly less in interest, easing monthly financial pressure.”

To illustrate her point, Lavhengwa provides a practical example: “If you are a new homeowner with a R1.5 million bond at prime, you would now save approximately R260 per month. If you have a petrol car with a 35-litre tank, a decrease in fuel prices means you'll save approximately R40 per month. For a diesel car with a 40-litre tank, the savings would be around R46 per month. This means as a consumer, you have a monthly saving of approximately R300 per month. This may not seem all that significant, but these monthly savings can accumulate over time, making a meaningful difference.”

With this in mind, Lavhengwa encourages consumers to consider how these savings, no matter how small, could be redirected to enhance their financial future. “One option is to use the extra cash to accelerate your debt repayments. By paying off your home loan or other loans faster, you could reduce the overall interest you’ll pay. This will not only ease financial pressure in the long term but free up funds to achieve other financial goals sooner.”

Lower debt repayments will also enable you to create financial protection as you will be able to allocate the extra money from lower debt repayments towards this safety net can provide much-needed peace of mind.

Alternatively, you could build or boost your tax-free savings plan, suggest Lavhengwa. If the consumer saves R260 and the Reserve Bank makes another cut in November and taking into consideration the decrease in the price of fuel, consumers could see their budget being freed up with an extra R600 per month. You could then either start a tax-free savings plan or continue contributing towards the savings plan given that the minimum contribution is R350 per month. This leaves R250 to be used for other expenses such as food and other personal expenses.

For those planning ahead, these savings could also be channelled into retirement contributions. Even small, consistent contributions can grow significantly over time, thanks to compound interest. The earlier you start, the greater the impact on your retirement savings.

If you're saving for a large purchase, such as a home, the savings can help you build a larger deposit. A higher deposit reduces the size of the loan required, which could also help you secure a lower interest rate, further decreasing your repayments.

Finally, a repo rate cut, even a small one, can boost consumer confidence by lowering borrowing costs and making credit more affordable. This may encourage some people to spend more or take on additional credit for large purchases like homes or cars. But Lavhengwa advises caution here. “Rather than increasing spending, now is the perfect time to use these savings to strengthen your financial position.”

While lower interest rates stimulate economic activity by encouraging borrowing and spending, for consumers, the focus should be on financial stability. “Redirecting savings into debt reduction, an emergency fund, or retirement planning can provide lasting benefits. By being proactive and taking advantage of lower rates, you can set yourself up for a more secure financial future,” Lavhengwa concludes.