Rates lowest in three years

Johannesburg - The latest interest rate cut is good news for heavily-indebted consumers as well as the property market. The household sector, recovering from the effect of rising inflation and interest rates during 2008, will see debt repayments declining further on the back of lower interest rates, says Luthando Vutula, managing executive of Absa Home Loans.

Vutula says the residential property market, experiencing low levels of activity, while property prices are declining over a wide front, will find some support in the lower rates, as housing is becoming more affordable to many households.

His comment comes after the key monetary policy interest rate - the repo rate - was cut by another percentage point to a level of 7.5%.

In response, commercial banks cut their lending rates to the public, i.e. prime and mortgage rates, by the same magnitude to 11%. Since December last year, interest rates have been cut by a cumulative 4.5 percentage points.

Vutula says the latest decision on interest rates came on the back of a further contraction in the economy in the first quarter of 2009, with the economy now officially in a recession. A recession is technically defined as two consecutive quarters of negative real economic growth.

Vutula says the further lowering of interest rates implies that mortgage repayments have dropped by a total of 23.8% since December last year, with the monthly repayment on a R500 000 mortgage loan over a 20-year term down by another R344 per month after the latest rate cut. This translates into a cumulative monthly saving of R1 608 on a R500 000 mortgage loan since December.

Despite the declining trend in interest rates, the economy remains under a lot of pressure, having implications for employment and household income.

- I-Net Bridge