Latest interest rate cut an opportunity for good financial planning

Although Tyson - and most of the country's economists - expect the Reserve Bank's Monetary Policy Committee (MPC) to continue to cut rates during the first half of next year with at least another 0.5 bps to be shaved off the prime lending rate, he believes that consumers must learn from past mistakes by decreasing their debt and either saving the difference or continuing to repay the same amount on their home loans in order to rapidly reduce  what is probably their largest monthly expenditure.  

"Rather than your repayments being predominantly interest with a small amount credited to the capital borrowed, homeowners can increase that balance and score by paying off their bond in a shorter timeframe. The benefit of this saving is that it cannot attract tax as it is simply a future cost reduction and not income," he says.

Based on the fact that most have been paying 11.5% interest on their bonds before the SARB lowered the repo rate (the rate at which it lends money to the commercial banks) to 8% in September and now 7.75% in December, this latest reduction takes a further R173 off home loans worth R1 million and R346 off R2 million bonds. Although these are small amounts, they will ultimately add up to more meaningful figures next year.

"We have been given a good indication by the South African Reserve Bank that the interest rates we have seen over the past two years are the ceiling. Always budget around the maximum interest rate and not the current interest rate. That way, if it comes down, and you do not decide to continue paying a higher amount on your bond, you have spare money to do other things," he advises.

Although he believes that what now appears to be a downward interest rate cycle provides a much needed boost for the property market, he says it is still too soon to tell exactly what impact this will have.

"It remains a buyers' market. 2024 has been a tough market for most areas and, in particular, the Gauteng and KwaZulu-Natal markets. This second interest rate cut, however,  bodes well for a good 2025 for the whole country as we are coming off a very low base," he explains.

Nevertheless, Tyson recommends caution as, although this latest interest rate cuts come off an inflation rate which is now below the Reserve Bank's 4.5% midpoint target range, a number of uncertainties remain - including hints by the central bank that it might lower its inflation range to below 3%.

South Africa unfortunately remains vulnerable to external pressures including the resurgent dollar on the back of Trump's re-election and rising petrol prices due to ongoing conflict in the Middle East. These, inevitably, have a knock on effect when it comes to household expenditure.

As a result, going into 2025, Tyson advises buyers to carefully consider their choices, taking location in relation to travelling distances and even facilities that allow them to work from home into account. Homes with solar power and water collection facilities can also lower utility bills which will rise in the new year.

"Tragically, too many people buy expensive houses when rates are low and are forced to sell their properties and lose money when the rates increase. Buying a property must be a medium to long-term commitment given the costs associated with entering and leaving the market," he concludes.