Rate cut gives borrowers some breathing space

Thursday's one-percentage-point cut in interest rates, announced by Reserve Bank Governor Tito Mboweni, is good news for many. It took the main mortgage and prime rates of the banks to 11 percent - from a high of 15.5 percent in December last year. The bad news is that Mboweni said no further "significant" rate cuts were likely. His problem is that inflation remains above the bank's 3 to 6 percent target range. And he blamed monopoly and cartel pricing in the food and steel industries, and also raised Eskom's request for an interim 34 percent tariff hike.

But borrowers have already had a good run for their money. Monthly mortgage payments on an R800 000 loan, over 20 years, had already fallen by more than R2 000 - nearly 19 percent - to about R8 800 before yesterday's cut.

The latest reduction will save householders another R550 on their monthly mortgage bill. They will also save on vehicle finance, where rates are also linked to prime.

Marcel de Klerk, managing executive of Absa vehicle finance, said the industry rate for about 70 percent of customers is prime plus 2 percentage points.

Banks set rates in line with the risk attached to the loan, and he said that at present, banks aren't lending to risky customers, so the risk premium is moderate.

The relief comes too late for many borrowers. Statistics SA said earlier this month that the number of people taken to court for bad debt rose by 22 percent in the first quarter, from the same quarter last year, and nearly 42 percent year-on-year in March.

But for those who have survived the earlier rate increases and have managed to hold on to a job, lower rates, combined with close to double-digit average wage increases this year, will find themselves in a stronger position. However, the collapse of the property boom has left many borrowers with loans worth more than their properties.

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