DIFFERENT TYPES OF INTEREST RATES, AND HOW THEY AFFECT YOUR MONEY
This year we saw the interest rate shift 3 times. 2023 has been one of the most significant financial years in the history of South Africa, after COVID-19. Although most people understand the interest rates at a basic level, most people don’t always understand the difference in the rates that affect us economically, and how the interest rates affect our savings and investments.
Set by the central bank (South African Reserve Bank, or SARB), the repo rate is crucial as it influences the general level of interest rates in the economy. Changes in the repo rate have a cascading effect on other interest rates.
How it Works: When the central bank raises the repo rate, borrowing becomes more expensive, and spending tends to decrease, helping to control inflation. Conversely, a lower repo rate makes borrowing cheaper, encouraging spending and economic growth.
Priemium Lending Rate
The prime lending rate is the interest rate that commercial banks charge their most creditworthy customers. It serves as a benchmark for various loans, impacting the cost of borrowing for consumers.
How it Works: The prime rate is typically set a few percentage points above the repo rate.
When the repo rate changes, banks often adjust their prime lending rates accordingly. Changes in the prime rate influence interest rates on mortgages, personal loans, and other consumer credit.
Mortgage Interest Rates
Mortgage rates directly affect the cost of buying a home for most citizens who finance their homes through loans.
How it Works: Mortgage interest rates are influenced by the prime lending rate and other economic factors. When the central bank raises the repo rate, mortgage rates tend to increase, making home financing more expensive.
Credit Card Interest Rates
Credit card interest rates affect individuals who use credit cards for purchases or carry balances from month to month.
How it Works: Credit card interest rates are often variable and influenced by the prime rate. When the prime rate goes up, credit card interest rates tend to follow suit, leading to higher costs for outstanding balances.
Savings and Fixed Deposit Rates
Interest rates on savings accounts and fixed deposits impact how much individuals earn on their savings.
How it Works: These rates are influenced by the prevailing interest rate environment. When the repo rate is high, banks may offer higher interest rates on savings products. On the contrary, savings may also be lower when the repo rate is low.