How to manage your home loan interest rate
South Africa is set for a year of interest rate hikes that will affect the purchasing power of South Africa’s middle class in the coming months, says Shaun Rademeyer, CEO of MultiNET Home Loans
However, as with rising inflation rates, households at different income levels will face challenges from rising interest rates amid a weakened economy.
Rademeyer comments: “The expected increase in the repo rate of 100 to 125 basis points through 2022 over 2021 levels will most certainly affect all consumers who are currently repaying repo rate debt, as the cost of debt service increases, they will need to reduce their spending on other items like food, fuel, insurance, etc.
But what does this mean for owners, and why should potential buyers worry if the repo rate goes down or up? The repo rate is probably one of the most important considerations when it comes to asking for a deposit.
“This not only affects a homeowner’s monthly repayment, but also the amount of interest that will be paid over the life of the loan,” says Rademeyer. The Monetary Policy Committee meets in January, March, May, July, September and November, providing six repo rate change opportunities per year.
The most recent announcement confirms once again 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 a good growth and help investments in South Africa.
What is the prime 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 rate, which is the repo rate plus the amount the bank adds to ensure it makes a profit on its loans. The lower the repo rate, the lower the prime interest rate.
“South Africa’s prime rate is currently 8.25%; 1.25% more than 6 months ago. This means buyers can afford 10% less than they could in May 2021, when the prime rate was 7%,” says Rademeyer.
With interest rates likely to continue to rise over the next few years, homeowners who have not reviewed their bond obligations should do so. Now is the time to make sure you get the best interest rate or decide if you need to lock in your interest rate.
When you apply for a home loan, it is by default based on a variable interest rate. Only once your bond is registered can you ask for a fixed interest rate and then a strict deadline is set before the offer expires.
How does lower interest rates benefit new homebuyers?
A lower interest rate will allow more buyers to afford a bond. MultiNET home loans 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 banks’ lowest and best offers. By going to more than one bank, MultiNET Home Loans can negotiate a better rate concession as the banks will compete to offer the best deal.
Fixed or variable interest rate?
Buyers often wonder whether they should request that the bond’s redemption be linked to a fixed or 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 after your bond is registered can you ask for a fixed interest rate and then a strict deadline is set before the offer expires.
Fixed interest rate
This means that the interest rate on your home loan will not change over a fixed period, usually 12 to 60 months.
Floating interest rate
The interest rate on the loan will change whenever the Reserve Bank of South Africa raises or lowers the repo rate. The variable interest rate is the default option for most banks.
Fixed vs Variable – Advantages and Disadvantages
The main advantage of rate fixing is that it allows you to plan your loan repayments for a specific period of time, regardless of fluctuations in the prime rate. However, we recommend that buyers carefully consider their options, both fixed and variable, in the context of their personal needs and take into account market conditions.
A fixed interest rate is generally higher because it presents more risk to the bank. The fixed rate is usually fixed for a period of up to five years.
Pre-qualification is essential
The determining factor should always be affordability, so take a close look at your financial situation, to see what you can afford and consider your financial commitments and current market conditions. Buyers are encouraged to use the free pre-approval calculator to get a better idea of their buying power.
Prequalification is more important than ever. “Prequalification will be an essential tool for buyers whose financial stability will play a key role in successful applications,” says Rademeyer. “Pre-qualification allows buyers to increase their chances of having an offer accepted, while giving them the opportunity to perfect their financial profile for preferential mortgage rates. This could go a long way to minimizing the impact of rising interest rates in the years to come.
Tips for reducing the interest rate on home loans
1. Opt for a shorter loan period
The repayment period of your loan is one of the main factors responsible for the interest you will pay. Longer loan periods, say 25-30 years, will reduce the amount of monthly payments, shorter loan periods, say 10-15 years, will help reduce the overall interest payable. Buyers can see for themselves how much interest is reduced for loans with shorter terms by using a home loan calculator. Before taking out a loan, it is essential to carefully choose the term of the loan so as not to pay higher interest on your loan.
2. Compare interest rates online
It is essential that you do proper research on loan products and compare rates before choosing 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. MultiNET home loans will apply to multiple banks on your behalf ensuring you get the best deal available with the best interest rate available.
3. Pay more as deposit
Most banks and other financial institutions finance between 75% and 90% of the total property value. You are required to contribute 10% to 25% of the remaining cost of the property. However, instead of paying the least, it is better to contribute more out of your own pocket as a down payment. The more you pay upfront, the lower the loan amount, which also directly reduces the interest you have to pay.
MultiNET home loans will always offer customers the best rate on their obligation. What seems like a small difference in interest rates can save customers a lot of money over the life of their loan. “A 1% savings over the life of a bond saves a client about 30% of the value of their bond in compound interest,” says Rademeyer.
MultiNET Home Loans is an independent mortgage originator with a personal touch in an industry dominated by a few huge players and nameless and faceless call centers, delivering meaningful results for clients through smart people and technology.