Home Loans and How to Get the Most Out of New Lower Interest Rates

Interest rates have dropped to record lows, meaning that if you're looking to get into the housing market, now is the best time to do so. And if you already have a bond, here's how you can pay off some of it quicker.

They say that every dark cloud has a silver lining, and though the COVID-19 pandemic cloud has been pretty thunderous, it too could offer a ray of sunshine if you're dreaming about buying your first home – or if you're already paying one off that is.

On the upside, due to the economic impact of the pandemic, the Reserve Bank has cut the repo rate to the lowest it has been since 1988. We'll save you the economics lesson – the main thing to know is that a lower interest rate puts money into the economy and makes paying off debt cheaper. What this means for you is the monthly instalments on your first home will be cheaper now than they were a few months ago! Fist pumps all around!

It's a buyer's market

The context of the lower interest rates is to lighten the load on our struggling economy, where, in our everyday lives, spare cash is a distant memory. But if it's still going well with your job and you're looking to invest in property, this could be the perfect time. You can now apply for more credit at your current salary or, if you want to look at it in another way, pay the same bond off in a shorter time than you would if you'd applied for credit/ bought your house in January 2020, when interest rates were a lot higher.

Either way, the cost of buying property has come down, which is excellent news for homebuyers. More fist pumps!

Lower interest rates mean you can pay off your existing bond quicker

It's not only for first timers - you can still take advantage of the lower interest rates if you already have a bond. Most lenders will adjust your monthly premium down in response to a lower repo rate. However, if you keep the monthly payment at the rate it was before the repo rate was lowered, you will effectively be paying off more of your loan each month, meaning you'll be paying it off quicker. See what we mean about that ray of sunshine?

No transfer duties on cheaper properties too

A property purchase of less than R1 million is exempt from transfer duties, so you could score even more. According to Andrew Golding, chief executive of Pam Golding Properties, the reduction in the repo rate has had a positive effect on demand for homes by first-time buyers, especially for properties below R2 million.

Should I fix my interest rate?

Fixing your interest rate is one of the great debates in the home loans world. Generally speaking, when a bond is approved, you get a variable interest rate based on a variety of factors, including what the repo rate is at the time and what the market conditions are like.

You may be able to negotiate a fixed interest rate for a term, but whether or not this makes sense for you depends on what your situation is.

According to our home loans expert, fixing your interest rate can be a good idea if the period for which you're negotiating this new rate is longer than two years. Any shorter and it's unlikely to be a real deal for you. "It is slightly more expensive to fix your rate in the short term, as this deal is riskier for the bank, but can be a benefit for you in the long term. But I wouldn't bother if the bank can't offer you the rate for more than two years," he says.

Be careful of getting too much debt

Beware! Nothing is permanent and interest rates may go up again in the future, making your debt more expensive. It can be tempting to see this period as an opportunity to look for a far more expensive place than you would have in pre-COVID times, and when the economic situation changes, you could find yourself having bitten off more than you can chew. So it's very important to carefully consider what you can realistically afford.

Taking advantage of the favourable residential property market starts here. Our home loan calculator tool lets you find out in minutes how much the home you're looking to buy will cost each month, and with the lower interest rates, you'll also be able to calculate the savings on your monthly premiums. So perhaps it's not such a thunderous cloud after all.

This article is for informational purposes only and should not be construed as financial, legal or medical advice.