When the South African Reserve Bank (SARB) announces changes to the repo rate, the media goes into overdrive: “Interest rates hiked!” or “Rate cuts bring relief!” But what does this really mean for your home loan - and do banks really borrow money from SARB before lending it to you?

Let’s break it down.

What Is the Repo Rate?

The repo rate (repurchase rate) is the interest rate at which commercial banks (like FNB, Standard Bank, Nedbank, Absa, Investec, etc.) can borrow money from the Reserve Bank on a short-term basis - usually to balance daily cash flow.

Think of it as the “base rate” of the financial system:

• If SARB raises the repo rate, it becomes more expensive for banks to borrow; or
• If SARB lowers it, borrowing becomes cheaper.

How the Repo Rate Influences Prime

The prime lending rate is the rate banks charge their most creditworthy customers. In South Africa, banks typically set prime at repo + 3.5%.

For example:

• Repo = 7%
• Prime = 10.5%

When SARB adjusts the repo rate, banks almost always adjust prime in lockstep. That’s why you see headlines like: “Prime increases to 11.75% following SARB hike.”

Why Do Banks Stick to This Formula?

Two reasons:

1. Uniformity & Transparency
   Having all banks tie prime to repo + 3.5% creates consistency in the market. Consumers know roughly where lending rates will land, and banks compete by offering discounts or premiums to prime (e.g. prime – 0.5% for a strong client).
2. Risk & Cost of Funds
   Even though banks don’t fund all loans directly from SARB, the repo rate signals the “price of money” in the economy. Ignoring it would expose a bank to risk and make its pricing uncompetitive.

Do Banks Really Borrow from SARB Before Lending?

Not in the way many people think.

• Banks don’t take your R2 million home loan from SARB’s pocket and pass it to you;
• Instead, banks fund lending mainly from customer deposits (your savings and cheque accounts) and other wholesale funding sources (like money markets, bonds, and interbank lending);
• The Reserve Bank acts more like a “lender of last resort” and liquidity manager, stepping in when banks need to top up reserves or balance flows.

So yes, banks can borrow from SARB, but most of their loan book is funded through deposits and capital markets - not by constantly tapping the Reserve Bank.

Why Not Just Use Deposits and Skip Repo?

Here’s the catch:

• Banks are required to keep a certain amount of reserves at SARB, and must balance inflows and outflows daily; so
• If a bank runs short on cash for settlement, it borrows overnight from SARB at the repo rate; and
• That’s why repo still matters - it sets the floor price for money in the system, even if most lending is technically funded from deposits.

What This Means for You

• When the repo rate changes, your bond instalment will change because banks peg prime to repo;
• Banks don’t “choose” to stick to repo + 3.5% out of laziness; it’s part of how the financial system stays stable and predictable; and
• While banks are flush with deposits, they still price your loan based on repo - because repo dictates the base cost of money in South Africa.

Use an Experienced Broker

The repo rate might sound like an abstract economic lever, but it has a direct impact on your pocket every month. When SARB raises repo, your bond repayment goes up. When it cuts, you breathe easier.

At Phoenix Bonds, we not only secure you the best possible deal relative to prime - we also explain the “why” behind the numbers, so you understand how your home loan fits into the bigger financial picture.

Because in property finance, knowledge is power. And that’s how you save money.