The prescribed rate of interest might not be something most people think about – until they find themselves in a legal dispute. Whether you’re suing or being sued, this rate can have significant financial implications, particularly when it comes to overdue payments or court-ordered settlements.
In a recent post by Norton Rose Fulbright, director Patrick Bracher and associate attorney Michael McCarthy note that the prescribed rate of interest has been set at 11% a year as of 1 March, down from the previous 11.25% a year.
The Prescribed Rate of Interest Act ties the rate to the repo rate plus 3.5%, ensuring it fluctuates in response to changes made by the South African Reserve Bank (SARB). However, there’s a slight delay – any repo rate adjustment affects the prescribed interest rate only from the first day of the second month after the change.
The most recent repo rate cut, announced on 30 January, lowered the repo rate to 7.5%, triggering the new prescribed interest rate. The SARB kept the rate at 7.5% when the Monetary Policy Committee met on 20 March.
For anyone involved in legal proceedings or debt-related matters, keeping track of the prescribed rate is crucial. It ensures compliance and prevents disputes over interest calculations. But don’t rely on the Government Gazette for updates.
“Do not look for a Government Gazette notice. Gazetting the change is not a requirement, and such notices are not always published on time, or at all, by the minister,” warn the Norton Rose Fulbright attorneys.
Aadil Patel, the head of the employment law practice at CDH, also underscores the importance of using the correct interest rate when pursuing claims.
“In terms of claims for interest in certain labour disputes, section 143(3) of the Labour Relations Act 66 of 1995 is particularly relevant,” Patel explains. “Section 143(3) states that an arbitration award (sounding in money) earns interest from the date of the award at the prescribed rate of interest. The only exception to this general rule is if the arbitrator makes a ruling to the contrary.”
Prescribed rate of interest explained
Bracher and McCarthy explain that the prescribed rate of interest applies to all debts unless a different rate is set by law, trade custom, or agreement between the parties. However, parties can avoid the prescribed rate by agreeing on an alternative, subject to laws such as the National Credit Act, which may limit the interest that can be charged.
The applicable interest rate is the one in effect when interest begins to accrue. Even if the prescribed rate changes later, the initial rate remains fixed for that debt.
According to Bentley Attorneys, the Prescribed Rate of Interest Act sets the maximum interest rate for mora interest – the interest accrued on overdue payments – and also governs the interest awarded in court judgments.
Mora interest applies when a payment is overdue, but no specific interest rate has been agreed upon. Section 1(1) of the Act states that if no law, contract, or trade custom sets a rate, the prescribed rate applies. However, if a contract specifies an interest rate for late payments, that agreed-upon rate takes precedence.
To claim mora interest, one of two conditions must be met:
- A formal demand for payment has been made.
- A specific due date for payment has passed.
Once either condition is met, the creditor can charge mora interest from that date, as prescribed by law.
Section 1(1) of the Act states: “If a debt bears interest and the rate at which interest is to be calculated is not governed by any other law or by an agreement or trade custom or in any other manner, such interest shall be calculated by the rate contemplated in sub-section (2)(a) as at the time when such interest begins to run, unless a court of law, on the ground of special circumstances relating to that debt, orders otherwise.”
In simple terms, if no interest rate is agreed upon, the prescribed rate applies unless a court rules otherwise.
Mora interest is simple interest, calculated annually (a year) on the original capital amount owed – it does not compound.
The floating rate system
For 20 years (from 1993 to 2014), the prescribed rate remained at 15.5% a year, despite fluctuations in the repo rate (the rate at which the SARB lends to commercial banks).
On 1 August 2014, the prescribed rate was reduced to 9% a year. This change was made because the fixed rate of 15.5% had been deemed to have become unrealistically high compared to South Africa’s economic conditions and borrowing costs. At that time, the repo rate had dropped significantly.
A major shift came on 8 January 2016, with the Judicial Matters Amendment Act. Instead of keeping a fixed rate, the prescribed rate was now linked to the repo rate plus 3.5%. This means the prescribed rate changes whenever the repo rate changes – but only takes effect from the first day of the second month after the repo rate adjustment.
By linking the prescribed rate to the repo rate, the law ensures that interest on overdue payments reflects economic conditions rather than staying fixed for extended periods.
Which rate applies?
Legal disputes can stretch over several years, raising an important question: when interest accrues on a debt, does the rate change over time, or does it remain fixed from the moment the debt becomes due?
According to Rushmere Noach, South African courts have consistently ruled that the interest rate in effect at the time a debt becomes payable remains unchanged until the debt is settled. This principle was established in Davehill (Pty) Ltd v Community Development Board (1988) and reaffirmed in Crookes Brothers Ltd v Regional Land Claims Commission for Mpumalanga (2013).
Rushmere Noach explains that once a debtor is in default – also referred to as being “in mora” – the prescribed interest rate at that time is locked in. The only exception is if a court finds “special circumstances” that justify applying a different rate, but these must relate to the specific debt rather than general market fluctuations.
This fixed-rate approach provides certainty, ensuring that interest calculations remain stable throughout a legal dispute. However, it also highlights the financial risk of delaying payments. Even if interest rates later decrease, debtors remain bound to the original rate applicable at the time they defaulted.
For creditors, this underscores the importance of acting swiftly to recover debts. For debtors, it serves as a reminder that once in default, interest continues to accumulate – often for years – at the rate set from the start.
A practical example
Suppose John owed R200 000 to Sarah, with payment due on 1 April 2016. When he failed to pay, Sarah formally demanded the money on 1 May 2016. At that point, the prescribed interest rate was 10.25% a year.
John eventually settles his debt on 1 June 2025, by which time the prescribed rate has risen to 11% a year (as of 1 March 2025). However, because his debt became overdue in May 2016, the 10.25% rate applies for the full period, regardless of later increases.
At 10.25% a year (fixed from May 2016):
- Interest a year: R200 000 × 10.25% = R20 500
- Over 9 years (May 2016 to May 2025): R20 500 × 9 = R184 500
- Total amount paid by John: R200 000 + R184 500 = R384 500
If the interest rate had changed over time, John might have paid more or less. For example, if the 11% prescribed rate (effective 2025) applied for the full period, his interest cost would have been:
- Interest a year: R200 000 × 11% = R22 000
- Over 9 years: R22 000 × 9 = R198 000
- Total amount: R200 000 + R198 000 = R398 000
In this case, John paid R13 500 less than he would have under the 11% rate, simply because the original 10.25% rate remained fixed from the moment he defaulted.
MDP Attorneys states that the unfortunate reality is that this aspect of credit transactions only comes under the microscope when claims are instituted or are being defended and at this point, it is already too late to negotiate the terms.
“It is therefore advisable for both debtors and creditors to carefully consider the terms of an agreement, verbal or written, regarding the applicable rate of interest before same is signed or confirmed, as a small change in the interest rate can have a major effect on the total amount due,” the firm states.
