AnalysisResidential News

Ways to Achieve Preferential Interest Rates on Your Home Loan

Despite economic turbulence in South Africa, the repo rate has remained two basis points lower than it was before the pandemic’s onset in March 2020. This, combined with high approval rates amongst the banks, has created favourable home loan lending conditions for buyers.

However, savvy buyers are always looking for further opportunities to maximise their return on investment and have turned to home loan interest rates as an avenue to reduce costs.

The latest statistics by ooba Group reveal that the average interest rate achieved for its customers was prime less 0.21% and further indicated that second-time homebuyers (who put down deposits) were enjoying further rate discounts.

“Preferential interest rates such as these can be achieved by ‘priming’ one’s financial profile prior to applying for a home loan,” explains Rhys Dyer, CEO of ooba Group.

Home loan interest rates explained 

“In the case of home loans, different customers receive different interest rates based on their individual financial risk profile. It all depends on what the bank is willing to offer, and how much of a risk they consider you to be,” Dyer explains.

“If you are deemed a low financial risk, the banks may offer you an interest rate below prime – known as a preferential interest rate.”

Homebuyers need to decide between a fixed or a variable interest rate on their loan. Dyer believes that this choice comes down to preference and a buyer’s appetite for risk: “With variable interest rates, when the prime interest rate goes down, so do your monthly home loan repayments and vice-versa. With fixed interest rates, you keep paying the same monthly repayment amount regardless of market factors such as the increase or decrease of the prime interest rate. However, if you opt for this option, you’re likely to be charged a higher amount from the get-go and won’t benefit from rates decreasing.”

Ultimately, a buyer’s interest rate is determined by their ability to prove their financial stability to the banks, and one of the most effective ways to do this is by getting prequalified before applying.

A chance to fix weak spots before applying

Prequalification is a certificate that buyers can obtain using a free bond indicator tool or by speaking to a home loan expert. Dyer explains that “prequalification plays a vital role in boosting your chances of receiving preferential interest rates because it helps to your ‘prime’ your financial profile before the banks assess your application.”

He adds: “The prequalification process acts as a preview of what you will go through when applying to the banks, but with lower stakes. It gives you a realistic insight into your financial status by assessing your credit score and affordability. It will also reveal any problem areas or weak spots that may need improving prior to applying for a home loan.”

Dyer cautions that leaving these weak spots unchecked decreases your chances of receiving preferential interest rates.

Further tips to achieve a better interest rate on your home loan 

Dyer shares additional his top tips to lower your financial risk profile and achieve the best possible interest rate on a home loan:

  • Boost your credit score. “Before starting the process, it’s vital that you know your credit score so that you can improve it if needs be. An excellent credit score (above 670) is the best indicator of your financial stability. You can bolster your credit score by paying back your debts on time and in full. You can check your credit score every three months using ooba Group’s online bond indicator,” says Dyer.
  • Put down a deposit. “The size of your deposit will influence your home loan interest rate. We recommend a deposit of around 10% to help lower your monthly bond repayments, achieve a great interest rate and to stand out as a serious homebuyer.”
  • Use a home loan comparison service (or bond originator) to see your options. “This is one of the most effective ways to achieve the best interest rate on a home loan. One of the biggest mistakes a potential homebuyer can make is thinking that the interest rate offered by the first bank they go to is the only one available to them. By making use of the likes of ooba, your application is sent to multiple banks, and some may come back with lower interest rates giving you the benefit of choice,” he concludes.