Putting in effort shopping around for the best bank that offers the interest rate on home loans is prudent, as some banks may offer you better interest rates, and a higher chance of home loan approval.
What Is an Interest Rate?
This is the amount that banks will charge, on top of your home loan, dependant on a number of factors. The banks will assess you according to your previous credit history as a way to determine your risk. With a fixed interest rate, you’ll pay back the same amount every month on instalments, but with a variable interest rate, you’ll pay it back depending on the interest rate.
How Do Banks Determine Interest Rates?
The South African Reserve Bank – SARB – determines the prime rate, which is the rate it will lend to banks. Banks will then charge their interest rate, which is the prime rate plus a percentage determined by the individual bank. The worse your credit record, the higher your risk and the higher the interest rate charged on the home loan. The better your record, the lower your risk, and the lower the interest rate you’re likely to be charged.
What Are Repo Rates?
The repurchase (repo) rate is the rate at which SARB lends money to South African banks. An increase in the repo rate results in an increase in the prime lending rate and, therefore, an increase in the interest rate on a home loan.
What Impacts Prime Lending Rates?
As mentioned, the prime lending rate is determined by the repo rate, which fluctuates according to the national interest rate, when banks need to borrow more money, the prime lending rate increases.
Why Do South Africa’s Interest Rates Change?
The interest rate is all determined by the supply and demand of funds, so when the demands for funds are higher and the supply low, then the interest rate is higher than when the reverse is in effect. The reason the interest rates change is to manage inflation or to possibly reduce the supply of money in the economy. A larger supply allows for more spending, which means you’re more likely to secure a home loan. It’s all about maintaining a healthy economy and controlling the flow of capital.
What Determines the Interest Rate on a Home Loan?
You want to go with a bank that is going to offer you a favourable interest rate on your home loan so that your bond repayment is more affordable. The interest rate on your home loan is determined by a number of factors, including:
The outstanding balance on your repayment. This is why paying as big a deposit as possible is in your favour in the long run. The outstanding amount of your home loan will be lower, which then lowers the amount of interest you’ll pay on the remaining loan.
The length of time you’ll be repaying your home loan will also affect the interest rate, because the longer the repayment term, the more interest is payable. This is why it’s always best to pay off your home loan as quickly as possible.
Your level of risk is a major contributing factor to the interest rate on a home loan as banks are concerned about defaulting. If you’re high risk, you’ll get a higher interest rate, so it’s better to find out your credit score and try to get it as high as possible to lower your risk.
Inflation is another factor in that when it’s expected to be high, the buying power of borrowed funds declines, and banks demand a higher interest rate to protect themselves.
Should You Get a Home Loan Directly Through Your Bank?
Most home loans are secured through your bank because you have an existing relationship with them, and they’re more likely to assist you. However, there are also companies that will assist in securing you the best interest rate. Here’s a look at the pros and cons of going through your bank.
Advantages
As mentioned, your existing relationship can improve your chances of securing a home loan with special rates afforded to customers.
Certain banks will offer special benefits for existing customers, such as in-house loan options customised for specific buyer segments.
Disadvantages
Your bank might have stricter lending standards and a higher interest rate.
There could be more fees because of compliance regulations.
You might have to suffer through the cross-selling of additional banking products.
Your banker is looking out for the bank, not you, which means you’re not necessarily going to get a good deal.
Your application could be rejected, wasting time you could’ve spent finding the best rate with other banks.
Is it Worth Working Through a Bond Originator?
There are reputable bond originators that will work for you to secure a home loan at the best rate. Here’s a look at the pros and cons of this format.
Advantages
They’re going to find you the best interest rate, not just the first one. A bond originator will submit your application to about eight different banks rather than just working with one.
Getting a home loan has become much tougher, and a bond originator stays on top of all the pre-requisites, outlining the process with each bank.
They have established good working relationships with a number of South African banks and can ease the process, giving you the background criteria for the home loan process.
They can assist you in getting pre-approval for a home loan. This means you’re better placed to secure a home loan in less time.
Disadvantages
Even if the bond originator secures the home loan, you still have to pay interest rates as dictated by the bank going forward.
What Can You Do to Get a Good Interest Rate?
More than which bank can offer you the best interest rate, you need to consider ways in which you can actually improve your chances of getting a good rate. Here are some steps to follow before applying for a home loan.
Step 1: Check your credit score
South African citizens are entitled to check their credit score for free once a year, thereafter you can pay a minimal fee to a credit bureau to find out where you stand. When banks consider your home loan application, one of the things they look at is the credit score. This indicates your previous credit behaviour, how likely you are to pay the bank the loan, and how much of a risk you pose to the bank.
Step 2: Improve your credit score
If your credit score is sitting below 600, then you’re going to have to improve your rating before applying for a home loan. This can be done by ensuring all outstanding debt is paid, that any instalments are paid on time, and that you don’t unnecessarily open new accounts that will get you in further debt.
Step 3: Eliminate your debt
A really vital element of your credit score is the debt-to-income ratio which is the amount of credit outstanding in ratio to the amount of money coming in. A high ratio means you have too much debt which will impact your chances of securing a home loan. Try to get the debt to around 36% of your income.
Step 4: Get pre-approval for a home loan
By applying for bond pre-approval, you’re showing any potential lenders, estate agents and property sellers that you’re a serious buyer with a higher possibility of getting a bond. This will expire after three months, and then you can reapply if needed.
Step 5: Calculate the repayments
Using a bond calculator, find out exactly how much you are likely to pay each month so that you can budget accordingly. But you need to remember that it’s more than just the bond repayments, you’ll also have to factor in other expenses like transfer costs, bond registration fees, rates and levies, as well as maintenance and insurance costs.
Step 6: Work with a bond originator
Rather than approaching the banks yourself, you can outsource the legwork to a bond originator as a way to get a home loan at the best rate. This makes the process much more hassle-free and allows you to get the best interest rate possible.
Step 7: Understand the application process
A reputable bond originator will not only find you a great rate but actually talk you through the entire process as well. You’ll need to know the requirements for a home loan, the time it will likely take, as well as any costs involved. This way, your expectations are managed, and the experience is that much more palatable.
Step 8: Consider a co-signatory
In the event that you’re really battling to secure a home loan, then you might have to consider a co-signatory on the bond who can shoulder the load. This person will have to have a good credit score or higher income with a good debt-to-income ratio.
Remember that it’s best, to be honest throughout the process as your financial history will be uncovered and it could result in you being rejected from receiving a home loan. By working with a bond originator, you’re not likely to get caught out and are improving your chances of getting the best interest rate through the banks.
