WHY does the difference between the repo rate and the prime rate never change? Why don’t the banks think about lowering their profit margins and absorb some of the Reserve Bank’s interest rate increases to help its customers?
“With the repo rate having risen by 0.5% last week, more people are asking these questions,” says the Rawson Property Group’s managing director Tony Clarke.
“The increase has now taken the repo rate to 6,75%, and with the banks maintaining their current margin between the repo rate and prime, the prime rate – and the variable home loan interest rate - is now 10,25%.
“This is the first time the prime and/or home loan rate has reached double digits since 2010, and it is a scary prospect for SA consumers, not just the many prospective homebuyers who will now be forced to put their plans on hold because they can no longer qualify for a home loan.”
Higher rates, he explains, also translate into higher monthly repayments on all types of credit, including car instalments, credit and store card repayments, and personal loan repayments.
“And most households in South Africa are already spending more than 75% of their take-home pay on debt repayment.”
For existing homeowners this also includes their monthly mortgage instalments, says Clarke, and at the same time, most households are already paying higher prices for food, water, property rates, insurance and education now than they had to pay at this time last year.
“In short, they were already stretched pretty close to breaking point, and this increase could see them snap.
“The increase will also naturally have a negative effect on the real estate industry, as first-time sales start to dry up, upgrading plans are abandoned and the number of existing owners going into foreclosure rises. But the implications will be far wider than this. Quite simply, economic growth will stagnate and everyone in SA will be poorer. We had hoped that when the Monetary Policy Committee raised the repo rate, the commercial banks might somehow see their way clear to absorbing the increase by deciding not to raise the prime rate - but this obviously did not happen.
“The difference between the repo rate, which is the rate the Reserve Bank charges the banks, and the prime rate, which is the basis on which banks charge consumers to borrow money, has remained unchanged at 3,5 percentage points for many years, although no one seems to be able to say why - or why it does not change as it does in other countries.
“In the US, for example, the average differential is usually about three percentage points, although it can and does vary from bank to bank. In the UK, the prime rate charged by most banks has for several years been the same as the repo or official bank rate and in Australia, the differential currently ranges from about two percent on home loans to about four or five percent on car finance and other short-term borrowing.”
Clarke says local banks can be expected to have three arguments against narrowing the differential, the first being that the prime rate is only an “indicator” and that some borrowers are already charged a lower rate.
“But to this we would reply that there are probably actually very few borrowers in this category, because they would have to be extremely low-risk customers, and there are not many of those around with the economy in its current state.”
The second argument the banks are likely to make, he says, is that they have to think about savers as well as borrowers – and that they can’t afford to pay savers as much if they are charging borrowers less – while the third is likely to be that they have to protect their shareholders, who expect them to keep making the good profits they have been showing for the past few years.
“At the end of 2014, for example, Standard Bank profits were up 15% for the year at just over R18 billion, while Absa (Barclays Africa) reported pre-tax profits of about R13 billion.
“And that is really the heart of the matter. As it is, savers are getting very poor rates on bank savings accounts, which often don’t even keep up with inflation, and we would of course not want them to get any less. But shareholders who are smiling as banks keep making huge profits should ask themselves whether that situation is likely to continue when high rates start to discourage large numbers of borrowers and the banks no longer have as many customers.
“Might it not be better to cut the differential between the repo rate and prime somewhat, and hope to boost the number of customers?” - Supplied.
