A lot of pitfalls present themselves when buying a home through a Home Loan credit facility. If you are not careful, you may find yourself facing serious financial implications.

Interest rates are just one of the eminent issues...

What is the Interest Rate on Your Home Loan?

The Rate of Interest is typically designed to secure a Lender's profit.

As a borrower of the Home Loan credit facility, it is in your best interest to know how Interest Rates work to secure the best offer available with favourable financial implications.

How do Interest Rates work?

Based on your risk profile, lenders determine a personal Interest Rate using their set criteria. The risk profile determines whether the lender will be prepared to approve a Home Loan on a higher (prime plus) or lower (prime minus) Rate of Interest in relation to the Prime Lending Rate.

The Prime Lending Rate is a benchmark percentage which banks use in the calculation of interest rates on individual loan applications based on the risk profile of the consumer. At the moment the Prime Lending Rate stands at 7 percent per annum. Therefore, depending on the risk profile of the consumer the bank will approve the Home Loan either below or above the 7 percent Prime Lending Rate.  

The question then would be, what influences the Prime Lending Rate?

When Commercial banks borrow money from the South African Reserve Bank, they pay interest known as the Repo Rate which currently stands at 3.5% as at 28 June 2021. Fluctuations in the Repo Rate influence proportional fluctuations in the Prime Lending Rate, as the banks have to factor in a mark up to cover their cost of borrowing money from the Reserve Bank. This then means if the Repo Rate is lower, the Prime Lending Rate will also be lower thereby resulting in interest rates on Home Loans more affordable. The inverse is true on the reverse side of things.

A Fixed Interest Rate structure is one whereby the interest on a Home Loan does not fluctuate but remains fixed for a specific period, usually up to five years. This is beneficial mainly for two reasons,

• firstly that there is certainty as to exactly how much you as the borrower has to pay during that period and,
• secondly, that when the Repo and Prime Lending Rates are increased one is cushioned from the effects thereof.

However, in improved market conditions where these interest rates decrease, a Fixed Interest Rate structured credit facility cannot benefit where flexible Interest Rate credit structures will naturally save.

The decision of going with a Fixed Interest Rate structure or one that fluctuates due to market conditions is one which needs careful judgment and guidance. We are extensively experienced in this respect.

Phoenix Bonds - Bond Originators South Africa

Phoenix Group specialises in bond origination and bridge finance amongst other specialist services. Our approach is comprehensive, thereby placing our clients in a position that is beneficial in their decision making.

While the Rate of Interest may be of financial gain to the Home Loan lender, deciding on which lender is offering the best interest rates on a Home Loan is key to one’s financial health.

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