How To Get Better Home Loan Interest Rates In South Africa

When buying a property, most property buyers prefer to simplify the process when applying for a home loan. Approaching their own banks would seem to be the most logical way - "as everything is already with them, and the paperwork should be so much easier or less than to start shopping around".

However, besides qualifying for and obtaining a home loan, the second most important issue for the buyer should be to obtain the lowest possible interest rate on the home loan, as it has huge financial implication for the buyer over the repayment period. If you manage to get a 0.25% reduction in your mortgage rate, the monthly saving may seem small. However, on a R1 million home loan a 0.25% reduction will save you R172 per month. Over a full 20-year period that would save you about R40 000.

Different bank customers receive different interest rates based on their individual financial risk profile. It all depends on what the bank is willing to offer, and how much of a risk they consider you to be. If you are deemed a low financial risk, the banks may offer you an interest rate below prime - known as a preferential interest rate.

The lowest possible interest rate can however only be achieved if the buyer has obtained sufficient bargaining power:

1. by ensuring that he or she has optimised their credit score before they applied for a home loan, and

2. when there is an element of competition build into the application process with the introduction of an independent (from the banks) bond originator's expert guidance.

What Can You Do to Get a Good Interest Rate?

Before applying for a home loan, managing your personal finance wisely is vital because it affects your credit rating in several ways and can improve your chances of getting a good interest rate.

A good credit score gives you more bargaining power as a borrower. You can negotiate better terms and conditions with the bank, such as lower fees or more flexible payment options. This could save you money and make the bond more affordable.

Here are 10 steps to follow to optimize your credit score and to raise the competition for your business:

1. To optimize your credit score

Step 1: Check your credit score.

Maintaining a good credit rating is crucial for individuals looking to secure home loans or for that matter any credit facility. Your credit rating, also known as a credit score, is a numerical representation of your creditworthiness and is used by lenders to determine your likelihood of repaying borrowed money.

South African citizens are entitled to check their credit score for free once a year, thereafter you can pay a minimal fee to a credit bureau to find out where you stand. When banks consider your home loan application, one of the things they look at is the credit score. This indicates your previous credit behaviour, how likely you are to repay the bank the home loan, and how much of a risk you pose to the bank.

Regularly monitoring your credit report is essential to understanding your financial position and identifying any errors or fraudulent activity to be able to promptly correct any inaccuracies. Addressing these issues can help ensure that your credit rating accurately reflects your creditworthiness.

Step 2: Improve your credit score.

If your credit score is sitting below 610, then you are going to have to improve your rating before applying for a home loan. This can be done by ensuring all outstanding debt is paid, that any instalments are paid on time, and that you do not unnecessarily open new accounts that will get you in further debt. Anything above 661 is considered a good credit score and is likely to earn you lower interest rates.  A credit score between 781 and 850 is considered excellent.

Your payment history is the most significant factor influencing your credit rating. It reflects how consistently you pay your debts, including credit cards, loans, and bills. By understanding personal finance, you can budget effectively, pay bills on time, and avoid any missed or late payments, which can have a negative impact on your credit rating. Avoid applying for more than one loan at a time because that will signal to lenders that your financial status has deteriorated.

Banks review numerous factors when processing home loan (mortgage) applications, and a good credit score expedites the approval process. Lenders will have more confidence in your ability to repay the bond, reducing the need for additional documentation or time-consuming verifications.

Step 3:  Building a Positive Credit History.

A positive credit history is vital for a good credit rating as it reflects how consistently you pay your debts, including credit cards, loans, and bills. You can start building a credit history early, even with a small credit limit or a secured credit card. Responsible use of credit includes avoiding missed or late payments. Keeping credit accounts open for an extended period helps establish a positive credit history. This history, in turn, contributes to a higher better credit rating.

A good credit score might increase your chances of qualifying for a higher bond amount. Lenders are willing to lend larger sums to borrowers with a strong credit history, enabling you to purchase a property that better suits your needs and aspirations.

Remember that as much as you need to manage your own accounts, those of your spouse will also need to be in good shape if you are applying for a joint bond. The banks will want to know about their credit history too.

Step 4: Try to eliminate your debt.

A vital element of your credit score is maintaining a low debt-to-income ratio - which is the amount of credit outstanding in ratio to the amount of money coming in. A high ratio means you have too much debt which will impact your chances of securing a home loan. Try to get the debt to around 36% (or lower) of your income, as that demonstrates to the financial institutions (banks) that you can handle additional credit responsibly.

Step 5: Keeping credit utilisation below 30%

Credit utilisation refers to the amount of available credit you have used. It is calculated by dividing your credit card balances by your credit limit. Keeping credit utilisation below 30% is generally recommended to maintain a good credit rating. Understanding personal finance helps you control this ratio by managing your credit card balances wisely, paying them off in full each month, and, most importantly, avoiding maxing out your credit cards and spending up to your credit limit.

2. To raise the competition for your business - introduce a bond originator's expert guidance.

Step 6: Get pre-qualified for a home loan.

By applying for bond pre-approval through a bond originator, you are showing estate agents and property sellers that you are a serious buyer with a higher possibility of getting a bond. The pre-approval will expire after three months, and then you can reapply if needed. The pre-qualification process acts as a preview of what you will go through when applying to the banks, but with lower stakes. It gives you a realistic insight into your financial status by assessing your credit score and affordability. It will also reveal any problem areas or weak spots that may need improving prior to applying for a home loan.

Step 7: Calculate the repayments.

Using a bond calculator, find out exactly how much you are likely to pay each month so that you can budget accordingly. But you need to remember that it is more than just the bond repayments, you will also have to factor in other expenses like rates, and levies, as well as property maintenance and insurance costs.

Step 8: Work with a bond originator.

Getting a home loan has become much tougher, and a bond originator stays on top of all the pre-requisites, outlining the process with each bank. Rather than approaching the banks yourself, you can outsource the legwork for free to a bond originator, as the banks pay the bond originators for any new business. This makes the process much more hassle-free and allows you to get the best interest rate possible since the originator will apply to about eight different banks rather than just working with one - creating an element of competition amongst the banks for your business.

Step 9: Understand the application process.

A reputable bond originator will not only find you a great rate but talk you through the entire process as well. You will need to know the requirements for a home loan, the time it will likely take, as well as any costs involved. This way, your expectations are managed, and the experience is that much more palatable.

Step 10: Consider a co-signatory.

If you are really battling to secure a home loan, then you might have to consider a co-signatory on the bond who can shoulder the load. This person will have to have a good credit score or higher income with a good debt-to-income ratio.

Conclusion

The size of your deposit will also affect your interest rates. The higher the deposit, the less risk to the bank, and therefore lower monthly repayments and interest rates.

Remember that it is best to be honest throughout the process as your financial history will be uncovered and it could result in you being rejected from receiving a home loan. When you work with a bond originator, you avoid potential pitfalls in the application process and increase your chances of getting the best interest rate from the banks.

It is important to note that credit scoring systems may differ across different banks and credit bureaus, so it is always beneficial to consult with a financial advisor or mortgage specialist who can offer guidance on improving credit scores and navigating the bond application process.