STUDIO83

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Heita holla...

Another week, more issues to address. Hoping the week is going well.
So after the first installation of #MoneyMatters, we have a few questions to respond to and while I’ll attempt to respond, I’ll try not to be as academic as possible or plain sound like an economist – I actually think economists don’t take enough risks as they are “always right” or know how to manipulate their forecasts into some semblance or correct info. Either way, this is this week’s edition.

Before I dive into the questions and attempt to answer them, it’s important to define a few things, we’ll start with the Prime Lending rate:

So, what is the Prime Lending rate? Loosely defined: it is the rate at which a Bank is willing to lend to the client, namely you and me. This rate is informed by the Repo rate ( the rate at which a Bank lends from the Central Bank, in our case the South African Reserve Bank).

The current Repo Rate in SA is 7.00% (this is why I said it’s important to follow the MPC announcements by the Governor of the Bank);

The current Prime Lending Rate is 10.50%;

There’s a variable of 3.5% between these two, so the commercial bank gets a lower rate and passes on the rate to the consumer plus 3.5%.

Economics is really easy if you get one factor right – it’s all about Supply and Demand. Where there’s little money in the economy, there’s a problem and where’s there’s too much money in the economy there’s a problem – it’s about finding a balance and this is why we have the systems of Money Supply (this could take a full 3yrs to explain, hence the 3year Bcom Economics degree... not!!) ok, enough with the jokes..

Another area worth explaining before this article get to the point is that of Inflation Targeting.

So what is Inflation and why is it a target? The good people in University will tell you that Inflation is a rise in the general price levels of goods and services in the economy over a period of time – so in lay mans terms it’s when you can’t buy a 330ml can of Coke for R5.00 like you could say a year ago, because the purchasing power of the unit of exchange being money is now weaker/or has a loss in real value.

Inflation is measured using an index which calculates the cost of goods and services of what is termed a typical household (Ecos 101 would explain how Goods, Services, Household and Govt relate to each other) – this index is the CPI (currently 5.80%); this rate is calculated by way of comparison over a year using the data from the same month (kinda like a birthday).

And now the questions and answers:

Q: Perhaps the writer could shed some light on how to negotiate Prime lending rates, when making purchases; such as cars, homes etc. I know that private clients, stand on better ground when negotiating lending rates -in fact  I've heard corporations such as Investec etc offer their clients prime -3 (I stand corrected- but you get the picture) - It would be great if the writer could shed some light on how 'regular' bankers could negotiate and how much ground we really have to do that.
 
A: Negotiating the rate on your loan application is really like asking a desired partner out on a date (you never know what the outcome will be until you try). These negotiations could either way based on your current Nett Asset Value (i.e. how much are you worth? Translated in bank terms to – how much of a risk are you?). so you need to look at your total exposure to other financial institutions, your age, your salary etc.. all these are factors in the 0.10 to 3.00 change you may or may not qualify for. Also  don’t always negotiate as they are a business and a business needs to meet its bottom line – thus the bank’s financial health and total debt exposure is also important. You are a risk and should be treated as such.Private Clients and High Nett Worth Individuals usually have a better experience at negotiating rates based on all the factors listed above – they have amassed considerable wealth and therefore can qualify for a better rate – also because they don’t see the bank as just a bank, they see the bank as a partner in their wealth creation.
 
I won’t get into the Prime-3 debate and surely can’t speak about the bank mentioned in the question (purely for ethical reasons); but I will say this – sometimes sellers of goods or services create products that make sense to those who CAN afford them. And just because it’s a home loan with a rate of Prime -3 doesn’t mean you can afford it! Plain and simple. Especially if it’s a variable rate because if Prime is 16% and you get it at say 13% and interest rates rise by 6%, you’re suddenly paying 19% when you could’ve just accepted 16%. Think about it.. this is why all those 4x4’s went straight back to the dealership after the interest rate increases left people deciding – home or car?

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