home-loan-interest-rates

Home loan interest rates: rate cuts mean 2020 is the time to buy

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When applying for a home loan, one of your most important goals should be to secure the lowest interest rate possible. Here are some ways to achieve that.

Article summary

  • 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.
  • A succession of rate cuts by the South African Reserve Bank (SARB) has brought interest rates to a record low. As of 24 July 2020, the prime interest rate stands at 7%, the lowest in more than four decades. Now is the time to borrow.

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.

It is primarily affected by two factors:

  • The prime interest rate
  • How much of 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 in turn determines the prime interest rate, and then the rate at which banks will lend to its 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. So your interest rate will be classified as prime plus or minus %, with the plus being whatever the bank decides to add on in your case.

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%.

With the cost of funding for banks increasing, fewer home loans are being offered by banks at below the prime lending rate. You’d need an exceptionally high credit score and a solid deposit to earn a rate below prime.

Why the South African Reserve Bank’s recent repo rate cuts makes it a good time to borrow

The repo rate is essentially the baseline interest rate for the whole country, and when the South African Reserve Bank lowers or raises the repo rate, that in turn pushes the prime interest rate up or down.

As it happened: in response to the coronavirus, and the damage it is expected to have on the economy, the SARB has made a succession of cuts to the repo rate, including cuts in March, April, May and July 2020. These cuts have brought the repo rate to record lows, and resulted in a prime interest rate of 7%, the lowest in more than four decades.

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.

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.

For example:

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 to 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.

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 especially suited to your particular financial situation.

An expert bond originator like evo 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. To make the home-buying process that much easier, evo also offers a range of home loan calculators to help make the home-buying process easier. Get prequalified for a home loan with evo, then, when you’re ready, you can apply for a home loan with evo.

 

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