First-time buyers are often so delighted at qualifying for a home loan, they overlook how interest rates may impact on their monthly home loan repayments.
Stanley Mabulu, channel management head of FNB home loans says the interest rate that financial institutions charge on a home loan has long-term ramifications for a consumer’s ability to service debt.
This is partially due to the nature of interest rates that fluctuate as economic conditions change.
“Moreover, the higher the interest rate, the more you are likely to repay at the end of the month.”
For example, if you take out a home loan worth R500 000 for 20 years at an interest rate of 13% (prime plus 3%) you are likely to be in for a monthly repayment of R5 900. However, for the same home loan at an interest rate of 11%, you are likely to pay R5 200, Mabulu says.
Three essential tips on how consumers can get better interest rates include:
Your credit score: Banks consider a number of factors and financial discipline when assessing your credit score. This information is used to determine your individual risk profile and ability to repay the loan.
“A good credit score often results in the bank offering you a good interest rate, while a poor credit score can lead to a higher interest rate, or even your home loan being declined,” says Mabulu.
Negotiation: Many consumers often accept the interest rate they are quoted without attempting to negotiate. But Mabulu says financial institutions are often willing to negotiate to reach a mutual agreement which suits both the bank and customer.
“If you are fortunate enough to get a favourable interest rate, rather pay the difference (money saved) as an additional payment into your home loan account every month to save on the total interest payable over the home loan term.”
Paying a higher deposit: This reduces the risk the bank is exposed to when granting you the loan.
This positively impacts your credit profile, enabling you to secure a more attractive interest rate. “Although the impact of a higher interest rate may not immediately be visible, the effects often catch consumers in the long-term,” says Mabulu.