Interest rates demystified: How do they work and how can you pay less?

If you've bought your home with the help of a home loan, then paying interest on that loan is part of life. Jawitz Properties unpacks home loan interest and explains what it is, how the amounts that you pay are determined and how you can pay as little interest as possible when you buy a home.

First things first: what is interest?

Your interest rate is the amount of money over and above the value of your new home that you'll need to pay back to the bank. The interest rate you are offered will be expressed as a percentage and will vary according to the current repo rate and your personal circumstances.

How do prime interest rates work?

When the bank offers you a home loan, the interest rate will typically be expressed as "prime plus two" or "prime minus 0.75" to provide two random examples. The "prime" referred to here is the prime interest rate which, as of October 2022, is 9.75%. This prime interest rate is based on the repo rate, which is the rate at which the South African Reserve Bank will loan money to the country's various banks. Currently, the repo rate is 6.25%. The difference between the prime lending rate and the repo rate is the amount that the banks add to ensure that they make a profit on the loans that they grant.

The repo rate is set by the Reserve Bank's Monetary Policy Committee. It gets adjusted as required to keep inflation below the target limit. In other words, the repo rate is used to keep inflation levels steady by determining how much money people have available.

How is your interest rate decided upon?

The specific interest rate that you are offered by the bank will depend on a number of factors - and it is likely to differ from bank to bank. Lenders will consider your credit score and payment history as well as prevailing economic conditions at the time. Generally speaking, the higher your credit score is, the better the interest rate you are granted will be.

How a bond originator can help you pay less

If you apply for your home loan through a bond originator, they will approach all the banks on your behalf. That means that although you only fill in one set of paperwork, your application will be submitted to all the banks. Over and above this, a bond originator will leverage their relationships with the banks on your behalf to get you the best possible rates. As these originators bring in big business for the banks, it is worth their while to give bond originators' clients great deals.

How to pay as little interest as possible

Putting more money (even just a little more) than the minimum payment into your bond every month probably sounds like a daunting prospect. However, by paying more than necessary into your bond, you can potentially cut years off the term of your loan. That means that your home becomes yours faster, and you are free to invest the money that you're currently paying into your bond elsewhere. Also, the sooner you can pay off your home loan, the less interest you will pay to the bank over the duration of your loan.

If you are able to put down a deposit on your property upfront, you are likely to be given a better interest rate - which in turn means that you'll pay back less interest.

For help with interest rates and information about bond originators and deposits, contact the Jawitz Properties team today. We are committed to helping you become a homeowner as efficiently and affordably as possible.