- A succession of rate cuts by the South African Reserve Bank (SARB) in 2020 brought the prime interest rate to a record low of 7%, and the rate remains the same as of June 2021.
- The prime interest rate affects home loan interest rates, which determine how much you’re going to have to pay the bank, above and beyond the actual value of the home you are purchasing.
- When applying for a home loan, one of your most important goals should be to secure the lowest home loan interest rate possible.
- Some ways to lower your interest rate include paying a bigger deposit on the home loan, and applying to multiple banks so as to secure the best deal.
Securing a home loan is a significant step on the way to owning your dream home and the home loan interest rate is the primary factor you should be looking at when comparing home loan packages. With that in mind, here’s everything you need to know about home loan interest rates in 2021.
What is a home loan interest rate?
The home loan interest rate is the bank’s way of charging you for the risk they’re taking by providing you with a loan. It determines how much you’re going to have to pay the bank, above and beyond the actual value of the home you are purchasing.
It is primarily affected by two factors:
- The prime interest rate
- How much of a risk the bank considers you to be (which in turn is mainly determined by factors such as your credit record and the size of the deposit you are paying)
Prime interest rates: How are they determined?
The SARB (South African Reserve Bank) controls the repo rate (repurchase rate); the interest rate at which SARB lends to South African banks. This determines the prime interest rate, and in turn the rate at which banks will lend to their customers.
The prime interest rate is the repo rate plus the amount added by the bank in order to ensure they make a profit on their loans.
From thereon, your risk worthiness will determine the amount added by the bank to their prime interest rate when calculating your home loan interest rates.
And if the prime interest rate falls, so will your home loan interest rate, by the same amount.
For example if the prime interest rate is 7% and the bank grants you an 11% interest rate, your rate is prime + 4%. If the prime interest rate drops to 6%, your rate will still be prime + 4%, meaning your rate now drops to 10%.
Of course, you’d need an exceptionally high credit score and a solid deposit for the bank to offer you an interest rate below the prime rate.
The South African Reserve Bank’s recent repo rate cuts make it a good time to borrow
In response to the coronavirus, and the damage it was expected to have on the economy, the SARB made a succession of cuts to the repo rate in 2020. The first interest rate cut was in March 2020, followed by cuts in April, May and July.
These cuts brought the repo rate to a record low, and resulted in a prime interest rate of 7%, the lowest in more than four decades.
As of June 2021, the prime interest rate remains at 7%.
This is good news for:
Home owners, who will find themselves paying less per month on their bond repayments.
Home buyers, who will have less difficulty qualifying for a home loan, and will be repaying their new home loan at a lower interest rate.
So if you’re looking to buy a home during the lockdown, the rate cut provides the perfect opportunity.
Other ways to lower your interest rates
Aside from waiting on the South African Reserve Bank to further adjust its interest rates downwards, which is not guaranteed, there are a number of things you can do to earn more favourable interest rates when applying for a home loan.
Save up for a large deposit
If at all possible, raise the biggest deposit that you can before buying a home. A deposit is usually 10 – 20% of the purchase price, but you can go higher, and the higher your deposit, the lower your interest rate.
Clean up your credit score
As far as your bank is concerned, the credit score is a big number above your head that tells them how much of a risk you are. Through various calculations based on your transactional records, the bank will arrive at a three-digit number ranging between 0 and 999. You can use ooba Home Loans’ Bond Indicator to check your credit score, and how much you can afford.
Any improvement in your credit score can only work in your favour and help you to qualify for a lower interest rate. You can clear your credit record by paying off outstanding debt, and ensuring you pay your bills timeously.
Shop around for the best deal
Since the lending policy varies from one bank to another, you may be able to find a bank with a home loan package specially suited to your particular financial situation.
An expert home loan comparison service like ooba Home Loans 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.
If you’re considering buying a home, the time is now, as the SARB rate cuts are good news for home buyers. South Africa’s largest home loan comparison service, ooba Home Loans, offers a range of tools that make the home-buying process easier. Start with our home loan calculators; then use our free, online prequalification tool, the ooba Bond Indicator, to determine what you can afford. Finally, when you’re ready, you can apply for a home loan.