FACTORS THAT AFFECT INTEREST RATES
Which Factors Affect the Interest Rate on Your Home Loan
There are a number of factors that influence the rate you are being charged on your Home Loan. We will look at what we call external factors, such as the economy, and internal factors, such as your own risk profile. Unfortunately the main impact comes from the external factors over which you and I have no control; but, at least, we do have some control over the internal factors.
Just about everybody is feeling the effect of the current high interest rates and the slowdown in the economy, so getting the lowest possible rate on your home loan is vital.
The repo rate is the rate the South African Reserve Bank charge commercial banks when they borrow money from the Reserve Bank. The prime rate is the current lending rate used by the commercial banks. Since September 2006 the prime rate has increased from 11.5% to 15.5%. In December 2008 we saw the first reduction of .5%; the first of hopefully many to follow.
The world has entered a period of food shortages and the price of food has fuelled the inflation rate. The inflation rate plays a major role in the S.A. Reserve bank’s decisions regarding rate changes. We saw the price of crude oil climb to unknown heights, which of course increased the price of everything else. Luckily that came down dramatically, and yet, from February we will pay more for fuel again!
The strength of the South African rand against other currencies also impacts on the inflation rate. Foreign investment has slowed down and Eskom’s increases are not making things any easier. So, these are all external factors affecting the interest rate you pay on your home loan over which you simply have no control.
Before you get totally depressed let’s look at the factors you can influence:
Your personal credit profile plays a major role in whether you will qualify for a home loan or not; as well as the amount that the bank is prepared to lend you. Before the new national credit act came into account the banks basically worked on a repayment to income ratio of 30% – i.e. your home loan repayments should not exceed 30% of your monthly income. Since the implementation of the new national credit act the banks have to look at your overall indebtedness to establish if you can afford to repay more credit. Your credit records and credit rating is seen as the best indicator of whether you pay your accounts regularly and on time, and also, if you can afford more credit.
The loan-to-value ratio. This ratio calculates the loan amount as a percentage of the value of the property. Before the worldwide economic crisis the banks were prepared to grant loans of 108% of loan-to-value ratio to enable clients to also borrow the money required for bond and registration costs. That type of loan is not currently available, so anyone who wants to buy a house will have to save sufficient money for the costs. If you want to negotiate a home loan rate lower than the prime rate you will have a put down a deposit and the bigger the deposit the better.
The size of the home loan. Home loans above R1 000 000 usually qualify for a discounted rate.
How profitable are you to the bank? Banks are profit-driven organizations so the more products you have with them, the more profit they make! They will therefore, in most cases, be prepared to grant you a lower interest rate if you have three or more products with them. Products could be accounts such as current accounts, credit cards or personal loans.
Personal factors such as your age and job stability will also influence the bank’s decision as to whether you qualify for a discounted rate or not.
The current value of your property: You may not be in the market for a new home loan and have been paying off your loan for a number of years. If you have your property revalued by the bank you may find that the loan-to-value ratio has improved considerably and this may qualify you for a reduction in rate as your risk profile has now improved.
Negotiate. Don’t just accept the rate the bank is offering you, shop around or use the services of a home loan originator to do the negotiation for you. Even a .5% discount can make a huge difference to the total amount of capital and interest you will eventually have paid on the loan. It will also reduce the loan term considerably.
With all the uncertainty and fluctuations in the global economy no-one can really predict what is going to happen with interest rates. The economists predict a steady decline and we can only hope they got it right. The best advice during these times is to save as much as you can and protect your biggest investment – your home.
Then – cheer up – “what goes up, must come down!”