Use Lower Interest Rates to Reduce Debt, Not Rack it Up

The benefits for consumers of the decline in inflation over the past year or so are beginning to show up in the economics figures. One way you can compound the positive effects of a lower-inflation, lower-interest-rate environment on your household finances is to reduce your debt.

It’s a case of taking the road less travelled, because it’s the opposite of what many people are likely to do: be seduced by the lower rates and take on more debt.

Two years ago, in January 2023, Consumer Price Index (CPI) inflation was sitting at 6.9% according to StatsSA, almost a full percentage point above the top limit of the SA Reserve Bank’s 3-6% target range. It is now at the bottom of that range – the year-on-year CPI figure for December 2024 was 3.0%, having dipped to 2.9% in November.

Interest rates took longer to start coming down. In fact, it was only in September last year that the SARB embarked on its rate-cutting cycle, bringing the repo rate down from 8.25% to 8.00%. A further 25 basis-point cut, to 7.75%, was announced in November and another, in January this year, brought the rate down to 7.5%. The SARB is being very cautious in its approach, citing possible impacts on inflation of US President Donald Trump’s proposed tariff regime on goods from China and other countries coming into the US. However, it is generally agreed by economists that the rate-cutting cycle will continue, although perhaps not as quickly as consumers would like.

Consumer optimism

According to the TransUnion Consumer Pulse Report for the 4th quarter of 2024, in line with signs of economic recovery, South African households are showing rising optimism and financial resilience.

“Only 20% [of respondents to the survey] reported a decline in income in the past three months, and positive outlook about future income rose significantly, with 79% expecting an increase (up four percentage points from Q3 2024), especially among Gen Z and Millennials. Three-quarters (76%) felt optimistic about their household finances in the next 12 months, up five percentage points. Inflation remained a top concern, although it has eased. In Q4, 65% of consumers were able to pay their bills in full, indicating improved financial stability, especially among younger generations. Many consumers prioritised faster debt repayment while also increasing their contributions to emergency and retirement savings,” the report says.

However, the report also found that, “in Q4 2024, demand for credit rose slightly, with 37% (led by Gen Z and Millennials) planning to seek new credit”.

A problem with taking on more credit at this time – apart from simply acquiring more possessions than trying to save – is that if rates rise unexpectedly, your debt burden could become overwhelming.

The savvy approach

A drop of 1% from the elevated interest rates we saw a year ago may not seem significant when paying off a mortgage bond, for example. But if you were able to maintain the payments you were making at those elevated levels when the rates dropped, and maintain them while they drop further, the saving in months or years paying off your bond could be more than you think.

On a 20-year bond of R1 million, at an interest rate of 11.75% (the prime rate before the cuts), the monthly repayments were R10 837, according to the ooba home loan calculator. On a bond taken out at 11.0%, the repayments would be R10 322, and on one taken out after a possible further 0.25% drop, the repayments would be R10 152. Maintaining a repayment of R10 837 (in other words, paying in an extra R685) at the lower rate could shave more than three years off the life of your bond.