This is probably one of the most important topics of discussion for any home buyer. The standard loan term for a home loan is 20 years and often longer to make sure you pay back your loan over such an extended period with the best terms and conditions, interest rate being top of the list, is vital.
I am often asked what a good rate is these days. That is not an easy question to answer as each applicant and each bond application is scrutinized on its merits. No two people have the same overall scoring, which is determined by a host of factors, including credit rating, income, employment, etc. and the property itself also has an effect on the overall offer the bank will make.
A deposit is essential if you want to get a good interest rate. At least 10% of the purchase price will ensure you minimise the bank’s risk to such an extent that they should offer you a rate below prime, if the overall scoring is good. A larger deposit, in the 20% to 40% range, will improve the rate offered even more. For first time buyers it is often impossible to contribute a deposit, in addition to the Attorney costs for transfer and bond registration (which cannot be included in the home loan any more), and they have no choice other than having to apply for a 100% loan. In these instances the banks will most likely offer a rate above prime, and if the overall scoring is not up to scratch, the interest rates sometimes go up to prime plus 2% and higher. I am not saying all 100% bonds will attract such high interest rates, but rather emphasizing the importance of a deposit to ensure a competitive interest rate.
To summarize, a good bond application with a 10% deposit should achieve a rate in the region of half a percent below prime (P -0.5%). In some instances for very good clients with large deposits will obtain P -1%. Much better than that is very unlikely in the current economic climate and the expectation is for the banks to start tightening their belts gradually from a pricing perspective in the coming months due to the junk status effects on the economy. With a likely Repo rate increase by the Reserve Bank on the cards, it is vital to carefully consider your budget when buying a property. You could find yourself paying considerably more for the home loan than originally planned. It is always a good idea to sit down with an experienced and knowledgeable specialist to carefully consider your options before entering into an agreement to purchase a property and this is normally covered in our pre-qualification process, which we urge all prospective home buyers to undergo. I will be able to give you a fairly accurate indication of the rate we could expect from the banks.
Below is an illustration of the potential savings, not only monthly, but over an extended period, if you achieve a good home loan interest rate.
A home loan of R1M over 20 years at 10.5% (prime rate) means repayments of approx. R9 950 p/m.
A home loan of R1M over 20 years at 11.5% (prime +1%) means repayments of approx. R10 650 p/m.
A home loan of R1M over 20 years at 10% (prime – 0.5%) means repayments of approx.. R9 650 p/m.
The difference between 11.5% and 10% is approx. R1000 p/m in Rand value. Over just one year that is a saving of R12 000. Most people stay in a house for about 5 years, so that is a saving of R60 000, not to mention the interest that is saved over that period.
The interest on a home loan is calculated daily on a compound basis. This means that if you are able to make additional payments, over & above the normal instalments or lump sum payments once in a while, you lower the interest on your home loan considerably.
I would seriously suggest that anyone considering applying for home finance in the near future take the time to do the necessary homework beforehand, so that the application is structured for the best possible outcome.
As always, I am available to assist with all your property finance requirements.
Yours in home loans…
Franchise Owner – Cape Town
Bond Gallery Cape Town
082 926 2884 021 180 4541/2 0866 355 496