Wealthy Maths: Prime and repo rates

In Latest, Wealthy Mathsby Stealthy Wealth

Every second month, the South African Reserve Bank (SARB) meets to discuss inflation and to set the repo rate. The repo rate is the rate at which the SARB lends money to the commercial banks. Although this may sound really boring, it’s something you should care about – especially if you have debt. This is because the repo rate affects the prime rate, which in turn affects interest rates. So the outcome of the SARB’s bi-monthly meetings can directly affect your monthly expenses.

Calculating the prime rate, based on the repo rate

Variable interest rates are usually tied to the prime interest rate (e.g. you may have a rate of prime + 0.5%). So the first thing you need to do is calculate the prime interest rate from the repo rate. Luckily the formula is pretty easy because the prime rate is always 3.5% above the repo rate:

If the SARB announces that the repo rate is going up to 7%, it means the prime rate will be 10.5%.

Calculating your interest rate

Once you have the prime interest rate, calculating your variable interest rate is easy.

Let’s use a prime rate of 10.5% to illustrate. If your interest rate is prime + 1.5%, you simply add 1.5% to the prime rate to calculate your interest rate:

10.5% + 1.5% = 12%

If your interest rate is prime less 0.5%, you subtract 0.5% from the prime rate to calculate your interest rate:

10.5% – 0.5% = 10%

For information on the current repo and prime interest rates, visit the SARB website.

Our friend Stealthy Wealth knows his way around maths. Luckily for us he also speaks human, which is why we asked him to explain the most important maths we need to know to be good at money. This is not your average maths class. Tune in once a month and turn into a money mathemagician.

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