/ 9 September 2010

How to use the rate cut

Since 2008 interest rates have fallen by more than a third, from 15,5% to 9,5%.

For example, if you had a R500 000 mortgage you would now be paying R2 108 less each month. Or put another way, if you had maintained your repayments you would have been able to pay your home off in just less than eight years!

Unfortunately few people actually used this windfall to pay off debt — clearly illustrated by the fact that our household debt to income ratio sits at 78%.

Most analysts believe September 9’s rate cut will be the last we will see, so it is important to use this to pay off debt as quickly as possible. As sure as night follows day, interest rates will pick up again and this time you need to be ready.

On a R500 000 mortgage you will save R220 a month. By continuing to pay this into your mortgage you will reduce your debt and be able to absorb the next rate hike without adjusting your budget.

Alternatively, if you have short-term debt, you may want to use this windfall to pay off this expensive debt first. Adjust your debt repayments immediately so that this saving does not just disappear into the black hole of daily expenses.

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