Repo rate and prime rate explained: what they mean for your loan repayments

What is the repo rate?

The repo rate is the South African Reserve Bank's main policy interest rate. It is the starting point for the cost of money in the economy, because it anchors the short end of the interest rates that banks and other lenders work from.

The Reserve Bank now calls it the SARB policy rate. It explains that this is the instrument previously known as the repo rate, a name adopted when the bank used a different system for managing liquidity. In 2022 the bank moved to a new framework, and the change in name does not alter the level of the rate or how it is decided.

You will still hear 'repo rate' everywhere in the news, on bank statements and in loan paperwork, so this guide uses both names for the same thing.

Who sets the repo rate, and how often?

The Reserve Bank's Monetary Policy Committee (MPC) decides the policy rate. The committee includes the Governor and the deputy governors, together with other senior officials of the bank.

The MPC meets six times a year, which works out to a decision roughly every two months. The Governor announces the outcome in a televised statement, and the statement is published on the Reserve Bank website.

The committee's job is to deliver on the inflation target. Its decisions look at inflation and the wider economy. Raising the rate generally works to slow price increases, and lowering it makes borrowing cheaper and supports spending.

You do not need to follow every argument. What matters for a borrower is the date of the next announcement and whether your own loan reacts to it.

What is the prime lending rate?

The prime lending rate is the benchmark that banks use as a reference when they price loans. In practice it is a formula and not a free market price: according to the Reserve Bank, since 2001 it has been an administrative reference set at a fixed margin of 350 basis points, which is 3.5 percentage points, above the policy rate.

That is why prime moves by the same amount whenever the policy rate changes. A bank may then quote your loan as prime, prime plus a margin or prime minus a margin, depending on how it judges the risk and cost of lending to you.

The Reserve Bank has also consulted the industry on a proposal to stop using prime as a reference rate and use the policy rate instead. Loan pricing itself would not change under the proposal, because banks would still set rates according to risk and funding costs. Check the Reserve Bank site for the latest position, because the arrangement may change over time.

How do these rates reach your loan, bond and credit card?

The route is simple. The MPC changes the policy rate, prime follows it, and lenders then adjust the rates on products that are linked to prime or to the policy rate. The products most exposed are variable-rate home loans, many overdrafts and credit cards, and some personal loans.

The National Credit Regulator (NCR) notes that the different maximum interest rates in the National Credit Act are, for the most part, calculated from the repo rate. Under the regulations published in 2015, for example, the cap for unsecured credit is the repo rate plus a set number of percentage points a year, and the cap for credit facilities such as credit cards and overdrafts is the repo rate plus a different set number.

Your agreement tells you which category applies to you. Look for two things in your quotation: the interest rate, and a statement of whether it is fixed or variable. A fixed rate stays the same for the term. A variable rate can move up or down when the benchmark moves, and your instalment may change with it.

Why is short-term loan pricing regulated differently?

The Act sets short-term credit apart as its own category. In the NCR's summary of the interest limits, most categories are calculated from the repo rate, while short-term transactions have a cap set per month that applies to the first loan and a lower cap per month for subsequent loans. That cap is not tied to the repo rate.

The reason is practical. A loan that lasts a few weeks has a small amount of interest in absolute terms, so a lender's costs are mostly in setting up and running the loan. For that reason fees count for a lot in a short-term quotation, and the Act regulates the initiation fee and the monthly service fee as well.

The caps and fee limits are reviewed and can change, so we do not print them as fixed figures here. The NCR publishes the current limits. What you can do is use your quotation: it must show the interest, the fees and the total you will repay, and the total is the number to compare. Our guide on the cost of a short-term loan shows how the pieces add up.

What does a rate change mean for a monthly repayment?

The effect depends on the size of the loan, the term and whether the rate is variable. Here is a clearly labelled illustration. The figures are invented round numbers to show the idea, and they are not a quote from any lender.

Imagine a variable-rate home loan of R1,000,000 over 20 years. At an interest rate of 12% a year the instalment is about R11,011 a month. If the rate falls by one percentage point to 11%, the instalment drops to about R10,322, which is roughly R689 a month less.

Now imagine a variable-rate personal loan of R100,000 over five years. At 12% the instalment is about R2,224 a month. If the rate rises by one percentage point to 13%, it becomes about R2,275, an increase of roughly R51 a month.

A change on a larger and longer loan has a bigger effect in rands. The pattern is the same either way: a rise adds to the monthly bill, a fall reduces it, and a fixed-rate agreement is unaffected until it ends.

Where can you find the current rates?

Rates change, and a number printed in an article can be out of date within weeks. The Reserve Bank publishes the current figures on its 'Current market rates' page, which lists the SARB policy rate and the prime rate. Each MPC announcement is also published as a statement on the same website.

For the limits that apply to lenders, check the NCR website. For the rate that applies to your own loan, read the quotation and the credit agreement, which must state it. If you cannot find the rate or cannot tell whether it is fixed or variable, ask the lender to point to the line.

How should you use this when you are thinking of borrowing?

Use the rate announcements as a reason to check your budget and not as a signal to borrow. A lower rate makes some borrowing cheaper, but a loan still has to be repaid in full, with the interest and fees.

If you already have a variable-rate loan, work out what a one percentage point rise would add to your instalment, and check that your budget can take it. If it could not, speak to your lender early. Our guide on how much you can afford to borrow shows how to test your budget before you commit.

• Ask whether the rate is fixed or variable.
• Ask what the instalment would be after a one percentage point rise.
• Compare the total repayable, not just the rate.
• Keep a buffer in your monthly budget for changes.