How to manage your home loan interest rate
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, says Shaun Rademeyer, CEO MultiNET Home Loans.
However, as with rising inflation rates, households at different income levels will face challenges with increasing interest rates within the context of a weakened economy.
Rademeyer comments, “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 homeowners 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 fund 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 8.25%; 1.25% higher than 6 months ago. This 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 does a lower interest rates benefit new homebuyers?
A lower interest rate will make it possible for 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 lowest and the best offers from the banks. By approaching more than one bank, MultiNET Home Loans can negotiate a better rate concession as the banks will compete to offer the best deal.
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.
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.”