How will rising interest rates affect your household bills?

The South African Reserve Bank raised its interest rate by 50 basis points to 4.75%. This is the 4th consecutive hike and the highest since January 2016 and is caused by heightened inflation risks stemming from mainly price increases on food and fuel caused by Russia's invasion of Ukraine and the ongoing supply-chain troubles that emerged during the COVID-19 pandemic [source: Businessinsider]. 

What is an Interest Rate?

Putting it plainly, an interest rate is a cost of borrowing money [source: Investopedia]. A borrower pays interest for the ability to spend money now rather than wait until they have saved up the same amount. Interest rates are expressed as an annual percentage of the total amount borrowed, also known as the principle [source: Bloomberg].

Example: Annual & Simple Interest Rate

Using the calculation [Simple interest = principal X interest rate X time]. If you borrow ZAR 10,000.00 from the bank with an interest rate of 4.75%, you will have to pay the bank the loan amount 4.75% x ZAR10,000.00 = ZAR 10,475.00.With a one-year lending agreement, if you borrow ZAR 10,000.00, you will have to pay ZAR475.00 in interest at the end of the year. 

If it were 10 years, the interest payment would be calculated at [Simple interest = ZAR10,000.00 X 4.75% X 10 = ZAR14,750.00]. Therefore, an annual interest rate of 4.75% translates into an annual interest payment of ZAR475. After 10 years, you would have made ZAR475 x 10 years = ZAR4,750.00 in interest payments [source Investopedia].

On the flip side, you are rewarded if you were to deposit money into your bank account or 'give' your money to the government or any other financial institution. Banks, governments, and other large financial institutions need cash, too, and they are willing to pay for it. If you put money into a savings account, the bank will pay you interest for the temporary use of that money. Governments sell bonds and other securities for the same reason. In this case, you are the lender, and the interest rate is your compensation for temporarily giving up the ability to spend your cash. Unfortunately, savings accounts and government-issued bonds pay relatively low-interest rates because the risk of default is close to zero [source: money. howstuffworks]. 

What does the hike in interest rates mean to you and your household coffers?

The interest rate hike is severe and harsh on a socio-economic level. We are in a unique situation as an economy in South Africa. We face rising interest rates, inflation, unemployment, slow economic growth, and soaring fuel prices. The following is a brief breakdown of how the increased interest rate may impact your life:

• On your savings - In theory, an increase in interest rates should boost your savings, encouraging you to save. Practically though, any improvement in savings rates will have a minimal impact on the value of the money you've tucked away because inflation is eating away at your savings. If you are in debt, you may instead pay off your financial obligations to offset the higher rates tied to your credit cards, home loan, or other debts, such as your car loan.

• On your spending power - As illustrated above, an increase in interest rates means an increase in the cost of borrowing, which invariably affects your disposable income and spending. Higher credit card, vehicle, and account payments, such as clothing, furniture, and appliances, fuel a downturn in consumer (impulse) purchasing.

• On paying off your home loans - If you have taken out a loan to pay for your home, it's advisable to close on a deal for a fixed loan rate if you haven't done so already. Ordinarily, bond rates fluctuate more in parallel with interest rates. Therefore, if interest rates go up, bond rates will also go up, making purchasing your home more expensive. 

• On paying off your credit cards, and other accounts - If you have borrowed on your credit cards, taken a personal loan or overdraft, taken a car loan, and bought your winter gear and blankets on credit from your favourite store, the interest on repayments may rise. The South African Reserve Bank hopes that runaway consumer spending will drastically decrease by raising interest rates, slowing, and flattening inflation.

As South Africans, we need to be more mindful of household expenditure due to increased interest rates. Add to that the ever-soaring Eskom prices, we highly advise you to replace your electric geysers with one of our reliable gas geysers to help ease the impact on your pocket. Go gas!

Contact us for professional advice.

If you are tired of spending ever-increasing amounts every month on the ever-soaring electricity prices and have decided you need a gas water heating system for your home or business, contact us today to find out more about the advantages of gas and gas geysers and to have one installed in your home today.

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