In July 2022, the prime interest rate was raised to 9%, which is an increase of 0.75% from the previous 8.25%. The prime interest rate has slowly been increasing since the 19th of November 2021 following the low rates we saw during the Covid-19 pandemic.
What Is a Home Loan Interest Rate?
The home loan interest rate is the amount of money you’re going to have to pay the bank back for a home loan, above the actual value of the home you’re investing in. The bank determines the level of risk associated with this particular loan and charges accordingly. This is why negotiating a more favourable home loan interest rate is key to your investment’s affordability.
What Determines Prime Interest Rates?
The SARB – or the South African Reserve Bank – controls what is known as the repo
rate (or repurchase rate) which is
the interest rate at which SARB lends to South African banks. The repo rate
will then determine the prime interest rate, which, in turn, determines the
rate at which banks will lend to customers.
To put it another way, the prime interest rate is
the repo rate plus the amount added by the banks to ensure they make a profit
off any loan given. The amount added by the bank is effectively your risk
worthiness determined by the bank. So, your interest rate is explained as prime
plus or prime minus the percentage the bank decides on.
As an example: If the prime interest rate is 7% and
the bank grants you an interest rate of 12%, then your rate is prime + 5%.
However, if the prime interest rate drops to 6%, then your interest rate drops
to 11% - which is still prime + 5%.
It’s very unlikely that you will get an interest
rate below prime because of the increasing cost of funding for banks, so you’re
essentially aiming to get as low a number above prime as possible, which means
lowering your risk substantially.
How Do You Get a Lower Home Loan Interest Rate?
With the lowering of the repo rate, you’re in a
favourable position as a property investor in that you’re more likely to
qualify for a home loan at a better repayment rate. But even when the interest
rate isn’t necessarily in your favour, it’s possible to negotiate a better home
loan interest rate with certain banks in several ways.
·
Save, Save, Save
The more money you put away, the more you can put
down on a deposit when you’re looking at buying a home. The general
rule is that your deposit should be at least 10 to 20% of the purchase price,
however, the more you can put down initially, the lower your interest rate and
the less you’ll pay in the long run.
·
Improve Your Credit Score
A credit score is usually rated between 0 and 999,
calculated using the details of your credit profile, and is used by lenders to
determine how much of a risk you pose. The higher the score, the better your
credit profile and the less of a risk you are to lenders. The lower your score,
the higher the risk you pose which means you’re unlikely to get a good interest
rate. South Africans are entitled to a free copy of their credit profile on an
annual basis, and it’s encouraged that this is sought so that you understand
exactly where you stand and what needs to be done.
What factors influence your credit score?
- Any missed or delayed payments will affect your credit history,
even if you make a double payment the following month. This repayment
history remains in place for a few years.
- Excessive debt will also negatively impact your credit rating, so
you need to work to keep your credit card facilities at less than 35% of
your limit.
- The time frame of your credit history is also considered, as well
as how many account applications have been submitted, and new accounts
opened.
What can you do to improve the
score?
- The first thing to do is request a credit report to check what your
score is and ensure all the details within the report are, in fact,
correct.
- Ensure all your monthly repayments are made on time by checking
there are always sufficient funds in your account. Often automated debit
order payments are easier than manual as you don’t have to remember each
month.
- Lower your outstanding credit by cancelling any unnecessary accounts
and avoid spending on credit wherever possible.
What score is best for a home loan?
Every home loan will depend on the individual, so
no one score will guarantee you a home loan at a good interest rate, however,
generally, your debt should be less than 36% of your gross income. Adopting
healthy credit habits should keep you in the 650 and up range, which leaves you
better positioned to secure a home loan.
Don’t Settle for the First Rate
If you’re in a financially viable position to
secure a home loan, then don’t be tempted to take the first offer you’re given.
You can either apply through several banks yourself, or you can work with a
reputable home loan comparison service that will do all the necessary legwork and ensure
you get a home loan with the best possible interest rate.
Pay Off Your Home Loan Quickly
Whatever your interest rate, it’s always a good
idea to pay off your home loan in the shortest amount of time possible. If, for
example, you’re paying off a R1 million bond at 10.5% over 20 years, and pay in an extra R500 a
month, you can shave around R240 386 off your repayments, as well as being
bond-free a full three years earlier. Double this increase to R1 000 a
month and you’re looking at saving around R386 589 and being bond-free
almost five years sooner than planned.
Do You Choose Between Variable or Fixed Interest Rates?
Once you’ve qualified for a home loan, you will
have to decide whether you want to go with a fixed or variable interest rate.
This is how the two options differ.
What’s a Fixed Rate?
As the name suggests, a fixed
rate will remain the same for the entirety
of a home loan term, meaning the cost of borrowing money doesn’t fluctuate with
the market.
Pros of a fixed rate
- Because the amount remains the same, you’re able to budget for
monthly repayments without being caught out.
Cons of a fixed rate
- Because the risk lies with the bank, the fixed rate is likely to be
higher than the current variable rate.
- The fixed-rate will not remain for the entire bond, but generally a
maximum of 60 months, after which you’ll have to renegotiate the rate or
opt for a variable interest rate.
What’s a Variable Rate?
Unlike the fixed-rate, a
variable loan rate will
adjust over time in response to market changes. In general, the variable loan
rate has a lower interest rate than a fixed interest as they are more of a
risk.
Pros of a variable rate
If you’re planning on paying off a home loan in a
short amount of time, then you can save a lot of money by opting for a variable
rate.
If the prime interest rate drops – as it has
recently – the amount paid on your home loan will also decrease.
Cons of a variable rate
On the other hand, if the prime interest rate
shoots up, so will your payments, making it more expensive to pay off a home
loan and difficult to budget for.
An expert home loan comparison service like MortgageMarket can assist in this regard, by submitting your
application to multiple banks and negotiating with the banks on your behalf.
This is a much better alternative to applying to a single bank through your
private banker and gives you the best chance of finding a home loan with
favourable interest rates.
