How the prime lending rate affects home buyers

When buying a property, one of the most important factors to consider is the interest rate. When applying for a home loan, your objective should be to get a lower interest rate because doing so results in significant long-term cost savings. There are ways to lower your interest rate, but there are other elements beyond your control, such as the South African Reserve Bank's repo rate.

How does the interest rate affect you?

The prime interest rate, often known as the prime lending rate, is determined by the repo rate. This is the lowest interest rate at which the bank will lend. This will be the repo rate plus the profit margin charged by banks. When you apply for a home loan, your personal interest rate will be the prime rate plus whatever the bank adds on, which is determined by how risky they believe you are. You'll pay lower interest rates if you have a sound financial status, which is represented by your credit score.

Why is the interest rate increasing?

During the pandemic, the prime interest rate was at its lowest in decades, but starting November 2021, there has been a series of interest rate hikes. SARB startled the financial markets by increasing its benchmark repo rate by 75 basis points to 5.5% at its July meeting, mirroring other central banks across the world. This latest hike means that the prime lending rate of commercial banks has increased to 9%. More interest rate hikes are predicted as the South African Reserve Bank seeks to compensate for the 7.4% inflation rate, the highest in 13 years.

What does this imply for prospective home buyers?

As interest rates increase and inflation soars, the window for taking advantage of historically low-interest rates has closed. However, it is still a great opportunity to invest in the home you have always wanted. In the current environment, the housing market is competitive, and banks are more inclined to accept home loans.

How to secure a lower interest rate

• Increase your deposit

Your prospects of obtaining a lower interest rate on your home loan are increased by the more money you provide for your deposit. The lender will be more likely to view you as a safe borrower and provide you with a lower interest rate if your loan balance is smaller than the value of your property. On the other hand, a lender might see your loan as riskier and may charge you a higher interest rate if you make a small deposit.

• Boost your credit score

Lenders can estimate how you might handle credit in the future by looking at your credit score, which provides them with a picture of how you have historically handled credit. In keeping with this, lenders often see a good credit score as a sign that a borrower will be dependable and return their loan as promised. Lenders are more likely to offer you reduced interest rates on a loan if they have faith in your ability to manage your credit.

• Reduce the term of your loan

If you reduce the length of your loan, for example, from a 30-year loan to a 10- or 15-year loan, you often qualify for a reduced interest rate. Due to their decreased risk to the lender, short-term loans usually have lower interest rates. Consider taking out a loan with a shorter term to help you pay it off faster if you can easily handle the bigger payments.

Are you looking for the home of your dreams? Get in touch with Knight Frank today for all your property needs on the Atlantic Seaboard.