In a Moneyweb PowerHour show a listener called in to ask a very interesting question about interest rates in South Africa.
After several interest rates hikes over the past 12 months the caller asked â€“ â€œIsn’t it time [The South African Reserve Bank] split the interest rates into two, one into interest on purchasing of homes or property, and one into consumer credit, so as to punish the consumer who is blowing his money on debt and to encourage the consumer to purchase into a tangible asset.â€
The question raises a very interesting point about borrowing money.
In SA, banks borrow money from the South African Reserve Bank (SARB) and are charged interest on those loans. The interest they are charged in determined by government and is known as the Repo Rate.
The bank then lends this money to you and me to purchase Property, Cars and other consumer goods.
Two Interest Rates:
Although is a no official TWO INTEREST RATES, you will notice that the interest on your home loan is substantially lower than the interest charged on your Car Purchase, Personal Loan, or Credit Card.
Therefore, if you wanted to take advantage of the Low Rate you should focus on paying for Cars, Holidays and other Bills through your Bond, and Consolidating your high interest debts into your low interest Mortgage.
Balanced Mortgage Management:
Although it is wise to consolidate your debts using your existing home loan, you need to maintain a good balance between paying off your outstanding bond and avoiding bad debt. If you keep refinancing your mortgage Iâ€™ll never really own your property because the bank is holding it as security against the Home Loan.