While there’s no getting around paying interest on your home loan, you can control the rate you wind up paying each month and ultimately, the period of time and amount of money you spend servicing the debt.
Here’s what you need to do to guarantee you get the best deal on the interest rate you pay on your home loan.
Maintain a good credit score
A critical starting point to getting the best interest rate available is maintaining a good credit record. This means optimally managing your financial affairs to ensure that you’re making repayments to creditors on time.
A sketchy credit score and record of missed or late payments will significantly increase the interest rate that banks are willing to offer you and in some cases, a bad credit record could lead to your home loan application being declined outright, Stanley Mabulu, Channel Management Head in the Home Loans division at FNB, warns.
“A good credit score often results in the bank offering you a good interest rate, while a poor one can lead to a higher interest rate or even your home loan being declined,” he says.
Tip: Be careful not to fall prey to a common misperception among consumers who believe that using your debit card, and not a credit card, to make purchases demonstrates good money management decisions that reflect positively with credit bureaus.
The reality is that this has no bearing on your credit score and won’t help you secure a better interest rate.
Reduce the bank’s risk
Although banks have started to relax stringent lending criteria and are making 100% home loans more accessible to consumers these days, it’s advisable to have a deposit saved up before you apply for a home loan.
Reducing the bank’s liability by paying a higher deposit will reduce the loan-to-value ratio, which allows the bank to offer you a more affordable interest rate.
Tip: RE/MAX CEO Adrian Goblet suggests putting your savings into a tax-free savings account.
“It is better to put your monthly contribution into a tax-free, short-term investment that yields higher returns than a normal savings account at your bank,” he says.
“Chat to your financial adviser to find out what the best options are. In all likelihood, they will be able to find an investment for you that will allow you to put away less than R1 700 a month, but still reach R100 000 by the end of five years.”
Don’t be afraid to negotiate
Never accept the first offer you receive from financial institutions and remember you are well within your rights to negotiate with bank officials to try to get the best deal.
While it can be easier, from an administrative point of view, to take out a home loan with the bank you already bank with personally, it’s best to shop around first.
You’d be surprised at how open banks are to negotiating and you stand a good chance of being offered a better rate.
Tip: If you are successful in getting a reduced interest rate, Mabulu recommends that you pay in the difference of the money you would have saved from the lower interest rate in order to reduce the total interest payable over the home loan term.
Paying as little as an extra R200 per month will shave nearly R100 000 off what you pay back the bank in interest.
- Figures above are based on an interest rate of 10,25%