What is an interest rate and how does it affect your bond repayments?

What is an interest rate and how does it affect your bond repayments?

The interest rate is one of the biggest considerations when buying a home. It determines your minimum monthly repayments, so it impacts your cashflow and could be a dealbreaker in terms of affordability.

But what is the interest rate exactly and how does it affect your bond repayments?

Rates of interest

The interest rate is the percentage at which banks lend money. There are different kinds of lending rates, depending on where the money comes from. Think of them as building blocks of the one that you're ultimately concerned with - the interest rate on your bond. Here's how it works:
  • Repo rate: The South African Reserve Bank, our country's central bank, charges commercial banks to borrow money. This is called the repo rate, currently at 7% (as of 24 November 2022).
  • Prime lending rate: The commercial banks add a little to the repo rate to cover their expenses. This is called the prime lending rate, currently at 10.5% (as of 24 November 2022). However, the banks still need to make a profit on top of that. So, in determining whether to lend to you, they take your financial track record into account to decide whether you are a high- or low-risk client.
  • Interest rate: This is the rate at which you will repay the home loan amount that the bank is advancing you. It is directly affected by your credit record and differs between banks. That's why it's essential to shop around and compare bank offers, just as you would for plane tickets, for example.

How low can you go?

One of your main aims should be to get the lowest interest rate possible, and you manage this by keeping a clean bill of financial health. By being responsible and getting your finances in order before applying for a loan, you can positively influence the interest rate banks will offer you. A lower interest rate does three important things:
  1. In the long term it brings significant savings.
  2. In the short term it eases the burden on your pocket by making your monthly repayments smaller.
  3. Over time, any additional funds you pay into your bond will bring down the overall loan amount faster, because there will be less interest gobbling it up. But make sure the terms of your loan provide for this, to avoid penalties.

Let the interest rate work for you

To place yourself in a position to get the best deal on your home loan, it makes sense to use a reputable bond originator like BetterBond, which doesn't cost you a cent. Remember, banks are companies competing for your business. So, you should shop around to see who offers you the best rate and BetterBond does this on your behalf, and deals with as many as nine different banks in the process.

Our stats show that on average our clients save 0.5% on their interest rate by using us to secure their home loan. To calculate how much you can potentially save on your interest rate Click Here.

You can see why it's in your interest to pay attention to the rates that affect your bond because they also affect your pocket.

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