Interest rate ups and downs
FACTORS OF INFLUENCE: ECONOMIC CLIMATE AFFECTS REPO RATE AND COST OF BORROWING
A lower interest rate means lower monthly repayments and savings on the total cost of your property.
Here’s a lowdown on interest rates:
Personal rate
This is as unique as a home and its buyer. It’s determined using a number of criteria and based on the client’s risk profile. Interest rates are a key cost to consider in home loans.
Prime lending rate, minus and prime plus interest prime
The prime lending rate is currently 10%; it’s effectively the starting point banks use to calculate interest rates for clients.
A riskier individual would get an above-prime loan, which would be at prime plus, for example, prime plus 1% making it an 11% lending rate. A low-risk client could get prime or lower, for example prime minus 1%, which means a 9% lending rate.
What rates? determines interest
The prime lending rate is a marked-up version of the repo rate: the interest rate commercial banks pay to borrow money from the Reserve Bank (Sarb). Currently it’s 6.5%.
The repo rate changes according to the economic climate. Higher interest rates make borrowing more expensive, thus deterring people from making big investments, so there’s less money circulating in the economy which slows down inflation. To kickstart a sluggish economy, interest rates are lowered to encourage investment. If the repo rate rises, prime goes up and the amount you pay on your bond increases. If it goes down, prime goes down and those savings pass to you.
Fixed interest rates
Banks also provide the option of a fixed interest rate home loan structure, usually for a specific length of time of up to five years.
Gerrit Disbergen of Engel & Völkers Financial Services says usually, consumers fix their interest rate if they believe the interest rate cycle is on an upward trajectory. However, deciding to fix a home loan interest rate depends on individual circumstances and should be a carefully considered option.