If you own a home or plan on buying property some time in your life, home loan interest rates will most probably play a very important part in your financial life.
Interest rates are those silent and unseen ghosts, which can bring great happiness, or which drives property owners (with an outstanding mortgage bond amount) to tears. Okay, that was the late-night-next-to-the-campfire version of my interest rate definition.
Interest Rate Definition
Interest is the cost of borrowing money from a lender. Lenders require borrowers to pay more interest (a higher interest rate) if the they have reason to believe that the lender's investment is at risk. Interest rate is the cost of borrowing money, expressed as an annual percentage of the borrowed amount. Different borrowers may pay different interest rates, even if they borrow from the same lender.
Prime Interest Rate
The standard interest rate (prime interest rate), or base home loan rate, is currently 10.5%. The prime interest rate is the annual interest rate, which the average person, with an average credit rating, borrowing from an average lender, on security of an average property, would pay on their outstanding home loan amount.
Some people are more average than others and lenders may loan money at a rate above or below this base home loan rate, usually depending on your loan profile. Each lender assesses your loan profile and financial circumstances according to their own criteria. But lenders tend to look for the same basic charcteristics in a potential home loan borrower, so your mortgage bond originator should be able to advise you on which documents and information to submit with your mortgage bond application.
Your mortgage bond originator can apply to various lenders and negotiate the best interest rate available. A bond originator will also be able to recommend the most appropriate home loan option, based on your individual needs, and give advice on the best way to pay off your home loan.
Interest Rate Discounts
Bond originators are able to negotiate a home loan rate of up to 2.0% below the home loan base rate (prime interest rate) from a lender, depending on your loan profile. Your loan profile is based on factors such as your credit history and the size of your deposit.
If you apply for a mortgage bond of more than 80% of the value of the property, for example, you will pay a slightly higher interest rate than the lenders could offer you if you had a 20% or more deposit.
Home Loan Repayment Terms
Most South African banks allow borrowers to repay their home loans over a term of 10, 15, 20, 25 or 30 years, although 20 years is the most common home loan term in South Africa. A longer home loan term will mean smaller required monthly repayments, which are attractive to certain property purchasers. But remember that you pay interest on the outstanding home loan amount, so the longer the term of a home loan, the more your home loan will cost you.
You can save a whole lot of interest by paying just a little more on your home loan each month. This also means that you will repay your home loan far quicker.
Home Loan Interest Rates
Your aim, as far as your home loan interest rate is concerned, will always be to get it as low as humanly possible.
This means that you will have to negotiate a good home loan interest rate from your lender before you accept the mortgage bond agreement. But it also means that you will have to keep negotiating with the lender throughout the term of your bond.
Remember that your risk profile is likely to improve over the years, because your property will most probably gain in equity and your history of dilligent and timely repayment could also be a positive factor.
