The best ways to reduce your home loan interest rate

03 August 2022

South Africa is set for a year of interest rate hikes which will hit the buying power of South Africa's middle-class in the coming months.

As with rising inflation rates, households at different income levels will face challenges with rising interest rates in a weakened economy, according to Shaun Rademeyer, CEO of MultiNET Home Loans.

Rademeyer says the expected increase in the repo rate of 100 to 125 basis points through 2022 from 2021 levels will most certainly affect all consumers that are currently paying off debt linked to the repo rate, as the debt servicing cost increases, they will need to reduce their expenses on other items like food, fuel, insurance, etc.

But what does this mean for property owners, and why should prospective buyers care if the repo rate decreases or increases? The repo rate is probably one of the most important considerations when it comes to applying for a bond.

"This affects not only a homeowner's monthly repayment but also how much interest will be paid over the entire period of the loan," says Rademeyer. The Monetary Policy Committee meets in January, March, May, July, September, and November providing six opportunities for repo rate changes per year.

The most recent announcement once again confirms that the SARB is following international trends to curb inflation and ensure that South Africa is seen as a good investment destination for foreign funds to provide good growth and help investment in South Africa.

What is the prime lending rate?

This is the cost at which banks are willing to lend money to consumers. The repo rate has a direct impact on the prime lending rate, which is the repo rate plus the amount which the bank adds to ensure they make a profit on their loans. The lower the repo rate, the lower the prime interest rate.

"South Africa's prime lending rate is currently at 9%, which means that buyers can afford 10% less than they could in May 2021, when the prime lending rate was at 7%," says Rademeyer.

With interest rates likely to keep rising over the next few years, homeowners who haven't looked over their bond commitments should do so. Now is the time to make sure you get the best interest rate or decide if you should fix your interest rate.

When you apply for a home loan, it is by default based on a variable interest rate. Only once your bond has registered can you apply for a fixed interest rate and then there is a strict time limit attached before the offer lapses.

How do lower interest rates benefit new home buyers?

A lower interest rate will make it possible for more buyers to afford a bond. You need a bond originator who will apply to more than one bank to secure the lowest interest rate, called a rate concession. This is determined by the difference between the lowest and the best offers from the banks.

Fixed versus variable interest rate?

Buyers often wonder whether they should ask for the bond repayment to be linked to a fixed or a variable interest rate. A variable interest rate means that the rate at which the home loan is repaid will fluctuate as the repo rate changes. When you apply for a home loan, it is by default based on a variable interest rate. Only once your bond has registered, can you apply for a fixed interest rate and then there is a strict time limit attached before the offer lapses.

Fixed interest rate

This means the interest rate on your home loan will not change over a specified period, usually from 12-60 months.

Variable interest rate

The interest rate on the loan will change each time the South African Reserve Bank raises or decreases the repo rate. The variable interest rate is the default option for most banks.

Fixed vs Variable - Pro's and Con's

The biggest advantage of fixing the rate is that it allows one to plan with clear knowledge of your loan repayments for a set period, regardless of fluctuations in the prime lending rate. "However, we recommend that buyers thoroughly investigate their options, both fixed and variable, in the context of their personal needs and consider the market conditions," says Rademeyer.

A fixed interest rate is usually higher, as it poses more of a risk to the bank. The fixed rate is usually set for a period of up to five years.

Pre-qualification is critical

The determining factor must always be affordability, so look carefully at your financial situation, to see what you can afford and consider your financial commitments and the current market conditions. Buyers are encouraged to use the free pre-approval calculator to have a better idea of their purchasing power.

Prequalification is even more important than ever. "Prequalification will be an essential tool for buyers with financial stability playing a critical role in successful applications," says Rademeyer. "Prequalification helps buyers improve their chances of having an offer accepted, while providing the opportunity to perfect their financial profile for preferential mortgage rates. That could go a long way toward minimising the impact of rising interest rates in the years to come."

Tips to reduce home loan interest rate

1. Go for a shorter loan period

Your loan repayment period is one of the primary factors responsible for the interest you will be paying. Longer loan periods say 25 to 30 years, will cut down the monthly instalment amount, shorter loan periods, say 10 to 15 years, will help reduce the overall interest payable.

Buyers can see for themselves how the interest gets reduced drastically for loans with shorter tenures by using a home loan calculator. It is critical before you sign up for a loan to choose the loan period carefully so that you do not end up paying higher interest against your loan.

2. Compare interest rates online

It is critical that you do proper research on loan products and compare rates before deciding on a particular product or lender. There are several third-party websites that can give you a clearer picture of the rates and other costs charged by different lenders.

3. Pay more on a down payment

Most banks and other financial institutions finance 75% to 90% of the total value of the property. You are required to contribute 10% to 25% of the remaining cost of the property. However, instead of paying the least, it's better to contribute more from your pocket as a down payment. The higher you pay initially, the lower the loan amount is, which directly reduces the interest you must pay as well.

"A saving of 1% over the lifetime of a bond will save a client about 30% of the value of their bond in compound interest," says Rademeyer.


Article published courtesy of Property 24


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