Due to the Covid-19 crisis, the economy is struggling, businesses are downsizing or liquidating, and jobs are not guaranteed. When money is tight and the future is uncertain, it’s natural to try and take advantage of any respite you can – like lower home loan repayment rates.
What are the various rates?
A home loan is a huge financial commitment. It’s also big business for the banks who sell them to you. Everyone pays for a piece of the pie and these rates, while unique to the transaction, affect each other:
1. Repo rate: The rate that commercial banks pay. This is set by the lender, the South African Reserve Bank (SARB) Monetary Policy Committee.
2. Prime lending rate: This is the repo rate marked up, and it is used for tailoring loans to consumers like you and I. This is the foundation of the interest rate the bank will offer you on your home loan. Banks factor the risk, their costs, and desired profit margins into the prime lending rate and it will be consistent across all banks and home loan providers.
3. Interest rate: This is where it gets fun (or not so fun, depending on your position). While it is possible to receive a home loan at – or even below – the prime lending rate, banks will create a risk profile that takes into account your unique circumstances – and this may drive up your interest rate. Their profile of you will include your credit rating, age, and income, among other factors. For example, if you’re considered a high-risk borrower the bank might offer you prime + 5% while if you’re a low-risk borrower you may be able to buy a house at 1% under the prime rate.
When and where and which type of interest rate
BetterBond Chief Executive Officer, Carl Coetzee, explained to Business Tech when and where you can make the choice between a fixed or variable interest rate:
“When you apply for a home loan, it is by default on the basis of a variable interest rate,” he said. “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.”
FNB’s head of home finance, Mfundo Mabaso, explains that the fixed interest rate is based on banks’ interest rate projections – meaning it’s unlikely you’ll get a fixed interest rate at or below the prime lending rate, even if you’re a low-risk borrower.
Fixing your interest rate
In July 2020, SARB cut the repo rate by 25 basis points – bringing the total to 300 basis points cut since the beginning of 2020. This in turn brought the prime lending rate down from 10% to 7%. But what does this mean for homeowners?
If you’ve taken out a home loan at a fixed interest rate, unfortunately it won’t mean much unless you’re eligible to review your interest rate with your home loan provider. If you haven’t reached the 5-year mark yet, you may not be able to review your interest rate.
If you’ve taken out your home loan at a variable interest rate, you’ll already be seeing savings in your monthly home loan repayments, but these will continue to fluctuate along with the repo rate. If you decide to fix your interest rate, be aware that banks are smart and will almost always fix your interest rate above the current prime lending rate – especially during turbulent economic times. Plus, if the repo rate is cut further, you may miss out on more savings as you can only review your fixed interest rate every 5 years.
What’s the short answer?
It’s important to remember that the repo rate cut also affects banks – so they’re finding it more challenging to lend money at higher interest rates. You may find yourself in a position where your bank is offering you bigger loans at lower interest rates than before, but just because you can doesn’t mean you should.
Unfortunately, there is no one-size-fits-all answer to whether or not you should fix your interest rate (or even invest in a second property) – it will always come down to your unique financial situation, along with your long-term goals.