When you apply for a home loan, one of your top priorities should be to secure a low interest rate. In order to achieve this, you need to be familiar with the repo rate.
We find out what the repo rate is, how it’s related to home loans and how you can monitor it.
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The link between the repo rate and home loans
Commercial banks borrow money from the South African Reserve Bank (SARB) in much the same way that we borrow money from them. They have to pay interest on these loans, and this is known as the repurchase rate, or repo rate.
Duann Cronje, a financial planner at Fiscal Private Client Services in Cape Town, notes that the repo rate determines the prime interest rate, which is the rate at which banks will lend to their customers.
In order for commercial banks to avoid making a loss, they need to ensure that they charge a higher interest rate than SARB is charging them. Therefore, as the repo rate goes up, the prime rate goes up, and as it goes down, the prime rate follows suit.
Because of this connection, the interest rate you receive on your home loan will be impacted by changes in the repo rate.
Here’s a quick guide on how this works:
- Repo rate increases > Prime rate increases > Higher interest rates on home loans
- Repo rate decreases > Prime rate decreases > Lower interest rates on home loans
Note that the interest rate you receive will also depend on your credit score and your net income. It will not solely rest on changes in the repo rate.
Understanding and monitoring the repo rate
The repo rate is a monetary policy tool that’s used by SARB to help keep inflation within the national target of between 3% and 6%. Cronje says that the repo rate is set by the Reserve Bank’s Monetary Policy Committee (MPC).
“The MPC consists of up to seven members, including the governor of SARB. They meet six times a year to set the repo rate. During every meeting, they decide whether they will lower, retain, or increase the repo rate,” says Cronje.
He adds that the most current repo- and prime rates can be found on SARB’s website. Alternatively, repo rate decisions are usually covered in articles on financial websites or newspapers, following press announcements by the SARB Governor.
Keep your credit score high so that you can ensure your home loan interest rate is low.