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.
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.
Why Is the Current Interest Rate So Low?
Even if you’ve not been interested in buying a house this past year, you’ve undoubtedly heard or read about the extremely low-interest rates with many referring to it being a ‘buyer’s market’. What effectively happened is, with the arrival of Covid-19 and subsequent lockdown measures, SARB had to cut the repo rate from March to July 2020 to minimise the damage to the economy. This is because it was coming on top of an already struggling economy with a contracting gross domestic product (GDP).
It’s currently sitting at 7% which is the lowest in some 50 years, making it a good time to buy – because it’s easier to qualify for a home loan – and a good time to be a homeowner, as repayment amounts are lower. Although it’s unlikely the SARB is going to reverse the interest rate cuts anytime soon, there’s always a risk of a spike at a later stage.
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.
Whatever way you look at it, the decision to invest in property now is a good bet as the prime interest rate is at its lowest ever. However, don’t venture into unknown territory without partnering with experts in the field. MortgageMarket will take all the hassle out of securing a home loan at the best interest rate available.