- The home loan interest rate determines 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.
- The 2.25% in rate cuts passed by the South African Reserve Bank (SARB) since the beginning of the year will make it easier to obtain home loans with favourable rates, making 2020 an opportune time to purchase homes.
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 2020.
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.
When applying for a bond, one of your most important goals should be to secure the lowest interest rate possible. And when the home loan is granted, you should do everything you can to reduce the repayment term and the interest that you pay. These will save you a great deal of money in the long term.
How does the SARB and its recent rate cuts affect your home loan interest rates?
The SARB (South African Reserve Bank) controls the repo rate (repurchase rate); the interest rate at which SARB lends to South African banks.
The bank’s general interest rates will be higher than the repo rate, so they can make a profit on their loans. This essentially makes the repo the base interest rate for the whole country, dictating how far the interest rate can fall.
When the SARB lower the interest rate, the banks in turn lower their lending rates, and more people are likely to apply and qualify for loans.
In response to the coronavirus, and the damage it is expected to have on the economy, the SARB cut the rate by a further 1% on 14 April 2020, after already having cut it by the same amount earlier in March. This means two big rate cuts within the space of a month, taking the prime rate to 7.75%, the lowest level since 1973.
This is good news for:
Home owners, who will find themselves paying less per month on their bond repayments. For example, on a bond of, say, R1 000 000, your repayment amount since 16 January 2020 will have dropped from R9 650 to R8 209.
Home buyers, who will have less difficulty qualifying for a home loan, and will receive more favourable interest rates on their loan.
So if you’re looking to buy a home after the lock down, the rate cut provides the perfect opportunity.
Of course, if you can’t afford to wait that long, bear in mind that you can buy a home during the Covid-19 lockdown, by using ooba home loans’ free, online prequalification tool, the Bond Indicator, to get prequalified, then applying online for the home loan.
Other ways to lower your interest rates
“People tend to accept that their bonds require a monthly payment that they have no way of influencing,” says Kay Geldenhuys, Head of Sales Fulfilment at ooba home loans, South Africa’s largest home loan comparison service. “In fact, there are a number of things that you can do to either alter the amount of interest you end up paying or the term of your repayments.”
Here are a few ways to save on interest…
1. Save up for a large deposit
If at all possible, raise the biggest deposit that you can before buying a home, or save up for a large first payment while you are waiting for transfer to go through. “With a deposit, you will save money on your monthly bond repayments and be able to pay off your loan faster, saving thousands of rands and shaving years off the lifespan of your bond,” says Geldenhuys. “A R20 000 deposit on a R1 million home loan, at an interest rate of 9.75% will reduce your total repayments by R45 528 over 20 years.”
And, the bigger your deposit, the better your chances of getting a lower interest rate and reducing the total interest charged on your bond.
2. 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.
Any improvement in your credit score can only work in your favour. You can clear your credit record by paying off outstanding debt, and ensuring you pay your bills timeously.
You can use ooba home loans’ Bond Indicator to calculate your credit score. This is a 100% secure, online tool that is available free of charge and without any obligations. Based on the information you provide, the tool will give you an indication of your credit rating, and it will also issue you with a Qualified Buyer’s Certificate that will enable you to house hunt with confidence.
3. Extend the term of your bond
Some people consider taking their bond over 30 years rather than the more standard 20. This reduces their monthly repayments, but ultimately increases the amount that they pay back, because the interest is charged over a longer term.
On a bond of R1 million with a 9.75% interest rate, extending the term to 30 years may result in a reduction in the instalment of around R893 per month, but the total repayments made by the end of the 30-year term will be R816 516 more.
“Increasing the term of your bond is only a good idea if you’re really struggling with affordability,” Geldenhuys notes.
4. Make extra repayments whenever you can
If you’re not struggling to make the monthly repayments, it’s actually always better to try to pay as much as possible into your bond each month. Interest on a mortgage loan is calculated daily and then billed monthly, so if you make additional payments into your home loan, you will reduce the outstanding balance as well as the interest that you pay.
“Every time you have some extra cash – a tax refund, a big commission, an annual bonus – pay some of that into your bond,” Geldenhuys advises. “You may miss it in the short term, but in the long run you’ll be far better off.”
5. 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 especially 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 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 the best interest rate.
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 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 bond calculator; 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.