South Africa is set for a year of interest rate hikes which will hit the buying power of South Africa’s middle-class in the coming months, says Shaun Rademeyer, chief executive at MultiNET Home Loans.
However, as with rising inflation rates, households at different income levels will face different severities of challenges as a result of the increasing interest rates.
The expected increase in the repo rate of 1% to 1.25% through 2022 will, he says, “most certainly affect all consumers that are currently paying off debt linked to the repo rate, as the debt servicing cost increases”. They will also need to reduce their expenses on other items like food, fuel, and insurance.
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But what does this mean for property owners, and why should prospective buyers care if the repo rate decreases or increases? Well, the repo rate is probably one of the most important considerations when it comes to applying for a bond.
“This affects not only a homeowners monthly repayment, but also how much interest will be paid over the entire period of the loan," says Rademeyer, explaining that the Monetary Policy Committee meets in January, March, May, July, September, and November, providing six opportunities for repo rate changes per year.
The most recent announcement once again confirms that the South African Reserve Bank is following international trends to curb inflation and ensure that South Africa is seen as a good foreign investment destination.
These are Rademeyer’s tips to reduce your home loan interest rate:
1. Go for a shorter loan period
Your loan repayment period is one of the primary factors responsible for the interest you will be paying. Longer loan periods, say 25 to 30 years, will cut down the monthly instalment amount; shorter loan periods, say 10 to 15 years, will help reduce the overall interest payable.
“Buyers can see for themselves how the interest gets reduced drastically for loans with shorter tenures by using a home loan calculator. It is critical that, before you sign up for a loan, you choose the loan period carefully so that you do not end up paying higher interest against your loan.”
2. Compare interest rates online
It is critical that you do proper research on loan products and compare rates before deciding on a particular product or lender, he adds, saying that there are several third-party websites that can give you a clearer picture of the rates and other costs charged by different lenders.
3. Pay more as down payment
Most banks and other financial institutions finance 75% to 90% of the total value of the property. You are required to contribute 10% to 25% of the remaining cost of the property, Rademeyer says.
“However, instead of paying the least, it’s better to contribute more from your pocket as a down payment. The higher you pay initially, the lower the loan amount is, which directly reduces the interest you must pay as well.”
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