When shopping for a home loan, most buyers hope to “negotiate the best rate” — and rightly so. Even a small discount on your interest rate can save you hundreds of thousands of rand over the life of your bond. But how do banks actually decide what rate to offer, and why are there limits to how low they can go? Let’s unpack the reality.

How Interest Rates Are Set: Prime as the Benchmark

South African banks price home loans relative to the prime lending rate, which is currently linked to the repo rate (set by the Reserve Bank) plus 3.5%. For example:

• If prime is 10.5%:
  • a competitive home loan might be offered at prime – 0.5% (10%) or prime – 1% (9.5%), depending on your risk profile; or
  • If your profile is riskier, you may be offered prime + 0.5% (11%) or more.

Everything is measured against prime - it’s the reference point across the industry.

Why You’ll Never See Prime – 4%

Banks can’t just hand out massive discounts like prime – 4%. Why?

1. Cost of Funding
   Banks don’t lend you money for free - they must cover the cost of deposits, wholesale funding, and compliance requirements. Prime sets the floor price for money in the system.
2. Credit Risk
   Even the best customer carries some risk. Banks must price for the chance of default, market volatility, and administration costs.
3. Regulatory & Systemic Stability
   If one bank started offering prime - 4%, it would distort the market, create unfair competition, and likely trigger regulatory intervention.

Why Banks Offer “Staff Rates”

You may hear of bank employees getting special “staff rates” – which can be anywhere from prime – 2% to prime – 3.5%, depending in their position in the bank.

This is not because banks can afford to give away money. Staff rates are a benefit of employment, designed to attract and retain employees, not a reflection of what’s available in the open market.

The True Limit: Prime – 2.5%

For the public, the lowest discount you’ll realistically ever see is around prime – 2.5%.

• That’s the maximum allowed under banking policy;
• It’s extremely rare, usually reserved for very low-risk clients with significant income, assets, and existing relationships with the bank.

Most strong applicants can expect somewhere between prime – 0.25% and prime – 1.8%.

The National Credit Act defines the maximum allowable limits on home loan interest. SARB doesn’t legislate how far below (or above) prime a bank can lend, however most banks’ policy will not go below Prime less 2.5% for the general public - because below that, the bank’s margin becomes razor-thin or negative.

Why Banks Earn Very Little on a Home Loan

Here’s the surprising part: banks don’t make big profits from home loans.

• Low Margins: Home loans are priced at razor-thin margins - sometimes less than 1%. By the time the bank covers funding costs, admin, compliance, and risk, there’s very little left;
• Long-Term Play: Banks view home loans as a way to build long-term relationships. Once you have your bond, they can cross-sell you other, higher-margin products (credit cards, insurance, investment accounts); and
• Security: Because home loans are backed by property as collateral, they’re seen as safer but less profitable compared to other types of credit.

What This Means for You

• Don’t expect miracles like prime – 4%. That’s not how the system works;
• Do shop around through a bond originator like Phoenix Bonds. Even shaving 0.5% off your rate can save you thousands over time;
• Understand that banks see your home loan as a gateway product - so they’ll fight hard to win your business, but within realistic limits.

Final Word

Interest rates on your home loan are all about balance: banks balancing their cost of funds and risk, and you balancing affordability and savings. With Phoenix Bonds, you don’t just get “whatever your bank offers” — you get a team that fights for the best possible rate across multiple banks, all while helping you understand the numbers.

Because even a small difference in rate is a big difference in your pocket.