How interest rates affect your home loan?

When you take out a home loan, the bank will charge you a rate for lending you that money. This charge is calculated as a percentage of your home loan amount and is known as your interest rate. The lower this interest rate, the better it will be for you. Sounds simple, right?

Sadly, it's a bit more complicated than this because the interest rate the bank grants you is linked to the Prime Lending rate set by the SA Reserve Bank. Sound confusing? Don't stress. We're here to unpack this further to help you understand how it all works...

What is a home loan interest rate?

There are many factors that can affect the interest rates a bank will apply to your home loan, including your risk profile. However, the biggest influence is linked to something called the "prime lending rate" or "prime interest rate", which can change over time. This is because the South African Reserve Bank (SARB) controls what is known as "the repo rate" (or repurchase rate), which is the interest rate at which SARB lends to South African banks, and is what determines the prime interest rate at which banks will lend to you.

How often do interest rates change?

The Monetary Policy Committee (MPC) meets every second month to decide whether interest rates need to be adjusted to combat inflation and manage other risks to the economy. At this meeting, they announce any changes to the repo rate will increase, decrease, or remain as is. For homeowners who would like to stay clued up on interest rates as and when they change, you can view the upcoming schedule of meetings on the MPC website.

By how much do interest rates change?

Usually, interest rates tend to change slowly and normally climb or drop by around 0.25%-0.75%. Rates will only change more than this when there are big economic changes. While this might seem insignificant, never underestimate the power of interest accumulating over the span of the loan term. For example, when interest rates were at 10.25%:

• A R1 million home loan would have cost you R2,355,944 at the end of the 20-year loan period.
• At just a 25 basis point drop, the same home loan would end up costing you R2,315,664 at the end of a 20-year period, which is a saving of R40,280.

What is a variable interest rate vs a fixed interest rate?

This is a great question and very important to anyone who is considering a home loan. A variable interest rate changes with the prime lending rate and is the default interest option on many South African home loans. However, a fixed interest rate stays the same for a specific period for which it has been granted. Because the amount remains the same, you're able to budget for monthly repayments without being caught out. However, because this poses greater risk for the bank, the fixed rate will almost always be higher than the current variable rate and can only be set for a period of about five years.

Which interest rate is better for you?

While most experts would recommend choosing a variable rate over a fixed interest rate, this decision is entirely up to you and your circumstances. Spend some time looking at the two different interest options in relation to your needs and what you will be able to afford.

How do I budget for the interest rate changes?

It can be helpful to use a bond calculator (which can be found on BetterBond's website) to see what you may qualify for upfront and also to see how much the repayments will be. Adjust the interest rate on the repayment calculator to see whether you can afford the home loan repayments for years to come if interest rates change. Once you have worked out what you can afford, contact your local RE/MAX office to start searching for the perfect home.