Don’t fight the interest rate gap, says Everitt

There has been some debate again of late about whether the fixed difference between the repo rate and the prime rate of interest is too large at 3,5 percentage points, and whether government should move to shrink it, but property experts are arguing against such a move.

The difference means that with the 50 basis point decline in the repo rate this week, the prime rate will drop to 9,5%, the lowest level it has reached in almost 30 years.

“The 3,5% is the difference between what banks must pay to borrow money and what they charge consumers to borrow from them,” notes Berry Everitt, CEO of the Chas Everitt International property group, “and there are many who think this margin is too big at a time when most consumers are still heavily in debt and battling to make ends meet.

“However, there are several other important factors to consider, the first being that banks have to put a percentage of every loan extended into their reserve funds, which cuts into their profits but provides a prudent hedge against bad debt.

“Banking legislation has seen this reserve requirement increased in recent years and thank goodness, because it enabled the banks to be much more accommodating towards borrowers in distress and default during the recent economic downturn than was possible in the late 1990s, for instance, when soaring interest rates resulted in thousands of people losing their homes.”

What is more, he says the banks have only recently begun to show more confidence in lending again, “and that should not be discouraged in any way as it is critical to the full recovery of the property market in particular and the economy in general”.

Thirdly, Everitt says, those calling for the differential between the repo and prime rates to be cut should also consider the many, mostly elderly people whose only income is the interest on their savings.

“Their incomes have been eroded considerably by the eight interest rate decreases since December 2008 and would no doubt fall further if the banks’ 3,5% margin were to be decreased.”

Article from: www.chaseveritt.co.za