Junk status: what does it mean for your bank account?

A summary of what you need to know, and plan for

By Hayley Parry*

Yesterday’s decision by ratings agency S&P to downgrade South Africa’s investment status to “junk” is going to have ramifications for South African’s of all walks of life. But what do you need to know – that you can act on practically – today to limit the downside to your personal finances?

 

  • Cut your spending

When we were downgraded to junk status, it put in motion a series of events where it will essentially cost the South African government more to borrow money (which they have to do, as we spend more than we earn as a nation). The knock on effect for you and I, is that these higher interest rates will increase inflation which will in turn, increase our cost of living. So things like food, petrol and electricity will definitely cost us more in the future. This means you’re going to need to cut costs where you can, in order to absorb these additional expenses.

  • Reduce your debt

Just as it’s got more expensive for government to service its debt obligations, so too will yours. Interest rates will rise and that’s going to impact how much you pay every month to service your bond, car repayment and credit card, store card or loans. The big question is how much will interest rates increase by and for how long? It’s impossible to know the answer to that question now, as it depends largely on how government & business respond to this downgrade and the risk of further political uncertainty. That said, you need to know that the interest rate is a moving target and can increase significantly. In this table below, I show you what a 4% increase on your home loan repayment would like in terms of how much MORE you’ll have to pay every month to service your debt:

 

LOAN AMOUNT INTEREST @ 9,5% INTEREST @ 13,5% Increase
R800,000 R7457 R9,659 R2,202
R1,500,000 R13,982 R18,110 R4,128
R3,600,000 R33,557 R43,465 R9,908

I think it bears mentioning however, that the last time SA was labelled as “junk status”, interest rates reached as high as 23% in the late 1990’s – causing untold pain for South African households – with many losing their homes and cars as they were unable to afford the increased debt repayments.

 

So what do you do if you know you can’t afford an increase in interest rates? You have a few options:

  • Pay down your debt now as quickly as you can
  • If you’re already struggling to make ends meet, consider finding out whether you qualify for debt counselling. 1Life’s trust, the Truth About Money, provides this service to South Africans using a reputable & trustworthy debt counsellor: http://www.truthaboutmoney.co.za/apply-now/. Going into debt counselling would protect you from further interest rate increases, whilst also ensuring you can pay your bills every month and not lose your house or car.
  • Consider locking in your interest rate on your home loan. Speak to your bank to find out what rate you’d be given now in order to lock in a rate, and for what duration.
  • Manage your risk

One of the well known downsides to this negative downgrade, is that it also puts businesses under financial pressure too. When the cost of debt is high for businesses, it often results in less growth and an increase in costs which in turn can result in businesses needing to retrench staff in order to remain open, or to close. If you think or know that your job could be on the line, now would be a good time to speak to your financial advisor about retrenchment insurance and weigh up the costs versus benefits.

  • Look for opportunities

It’s not all doom and gloom. If you’re in a situation where you have savings, little debt and an appetite for risk, you may well find you have an opportunity to buy shares, or property at good value as others are forced to make distressed sales. Again, speak to your financial advisor about where he or she may see value in terms of investing opportunities for you to use to grow your wealth.

*Hayley Parry is the co-founder of The Money School, an independent financial education company proudly associated with the Truth About Money.