
In South Africa and worldwide, interest rates finally peaked last year. Now they have turned a corner, following the first interest rate cut in four years. More are expected to follow.
Falling interest rates change the financial picture, and the investment (and spending) strategies that make the most sense.
The impact of falling interest rates for average South Africans
Good news for borrowers
Interest rate cuts lower the cost of borrowing and increase the disposable income and spending power of ordinary South Africans.
Home owners pay less on their bonds, and consumers have a little more financial leeway.
Cooling inflation, the key driver of falling interest rates, leads to an easing of prices of day-to-day items. That’s the good news.
Bad news for fixed-interest investors
For conservative investors, with the bulk of their savings in cash instruments like savings, deposit and money-market accounts, falling interest rates mean lower earnings.
Retirees living off fixed income are especially hard hit. Any downward trend in the interest rate diminishes the short- to medium-term growth of cash reserves.
A dynamic interest rate environment requires financial agility – the ability to adapt saving, spending and investment strategies according to prevailing conditions.
How to make falling interest rates work in your favour
We provide a round-up of key ways to benefit from falling interest rates in South Africa.
1. Get rid of debt faster
With more money in your pocket, it’s hard to resist spending it on items you want but don’t need. That’s a battle many South African consumers don’t win.
A savvier way of leveraging the lower repayments on your home loan and vehicle finance is to use the surplus funds to settle the debt more quickly.
A shorter repayment term reduces the amount of interest you pay, and lowers the end-cost of your property and car.
Similarly, clearing the balance on credit cards and other high-interest loans is a huge step towards financial wellness.
2. Improve your credit rating
Paying off what you owe more quickly has ramifications beyond a lower debt burden.
It has a direct impact on your credit score – one that will be met with approval by banks and other creditors.
A higher credit score ensures easier loan approvals, at cheaper rates.
3. Invest in bonds
A low interest rate cycle typically leads to more economic activity, faster growth, higher earnings and positive market sentiment.
It’s the perfect time to invest in the sectors and asset classes that tend to perform well in a falling interest rate environment.
For example, corporate and municipal bonds are fixed-income investments that pay out at a set rate.
When interest rates fall below this rate, bond prices go up, especially bonds issued during high interest rate cycles.
Interest rates in South Africa are effectively at the beginning of a downward trend, making bonds more attractive to investors.
4. Consider high-performing equities
When there is more liquidity, the demand for shares increases, along with share prices.
Businesses are more likely to borrow funds at a cheaper rate to fuel growth. Sectors that outperform include property development, building supply and home improvement companies, car dealerships and retailers.
Real estate investment trusts (REITs), funds that focus on technology and other rapid-growth shares are asset categories that traditionally do well when interest rates fall.
Of course, this is no guarantee of favourable returns – but it is an expected trend.
5. Consolidate personal loans
Consolidating loans involves getting a loan at a lower interest rate and using it to pay off debt to multiple other lenders.
This makes financial sense only if you do the math properly, ensuring it will save you in the long run. When interest rates are low, the potential for doing this is greater.
Consolidation can make debt easier to manage. You’ll typically pay less in service fees and won’t have to keep track of multiple payments, outstanding balances and disparate interest rates. It may also reduce stress if you can pay off specific debtors.
At LoanAgainst, we don’t offer financial or investment advice. For this, we recommend speaking to a qualified financial consultant. What we do offer is fast, short-term loans secured by personal movable assets. Call us on 064 976 7106 for more information or simply complete and submit our online loan application.