What are the different types of interest rates?

Author
MyProperty
South Africa's #1 independent property portal

Here is a lowdown of everything you need to know about interest rates:

Personal interest rate

A personal interest rate is as unique as a home and the individual who buys it. It is determined using several criteria based on the client’s risk profile. The interest rate is one of the key costs to consider when comparing home loans.

Prime lending rate, prime minus, and prime plus

The prime lending rate is effectively the starting point that banks use to calculate interest rates for clients. It covers the bank’s basic profit margin, which is then set higher or lower based on the applicant’s risk profile. A riskier individual would get an above-prime loan, which would be at prime plus, for example, prime plus 1%. A low-risk client could get prime or lower, for example, prime minus 1%.

What determines interest rates?

The prime lending rate is a marked-up version of the repo rate. The repo rate is the interest rate commercial banks pay to borrow money from the Reserve Bank. By raising or lowering the repo rate, the Reserve Bank makes it more or less expensive for commercial banks to borrow money. This, in turn, affects how affordable they can lend money to consumers and this determines the prime lending rate.

The repo rate changes according to the economic climate. Higher interest rates make borrowing money more expensive thus deterring people from making big investments, so there is less money circulating in the economy which slows down inflation. To kick-start a sluggish economy, interest rates are lowered to encourage investment.

If the repo rate goes up, the prime goes up and the amount you pay on your bond increases. If the repo rate goes down, the prime goes down and those savings are passed on to you.

A lower interest rate means more affordable monthly repayments as well as substantial savings on the total cost of your home over the lifetime of the bond. If there is a hike in interest rate, however, it could significantly affect your cash flow as your bond repayments would increase.

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. This means that the interest rate doesn’t fluctuate during the fixed rate period, allowing you to accurately predict and plan for future payments as you will know exactly what your repayments are.

Consumers fix their interest rate if they believe that the interest rate cycle is on an upward trajectory. This said, the decision to fix a home loan interest rate depends on individual circumstances and should be a carefully considered option. It is ideal for consumers who own multiple properties as the stable rates would buttress against future rate hikes. The disadvantage of this option is that it could result in the homeowner missing out on savings should the Reserve Bank decide to switch to an interest rate reduction cycle.

Do your research and speak to a bond originator before deciding on a home loan option.

Property questions?
Get quick answers about buying, selling, renting, and more from our AI powered real estate bot
Home Loans Property News
Understanding hidden home ownership costs before buying your first home
Market & Opinion
Understanding hidden home ownership costs before buying your first home
11 Nov 2024
Before buying your first home, it’s essential to budget for hidden costs beyond the bond repayment. Common expenses include utility fees, municipal rates and taxes, homeowner’s insurance, and ongoing maintenance. Planning for these costs can help first-time buyers in South Africa manage their finances more effectively and avoid unexpected expenses.
read more
Understanding home equity - what it is and why it matters
Market & Opinion
Understanding home equity - what it is and why it matters
05 Nov 2024
For many home buyers, the main focus is on creating a home, often overlooking the investment potential beyond knowing that real estate generally appreciates over time. However, understanding and leveraging your property’s equity can be transformative, helping you manage finances, invest in home improvements, and build wealth.
read more
The biggest regrets of first-time home buyers
Market & Opinion
The biggest regrets of first-time home buyers
01 Nov 2024
Buying your first home is an exciting time and it should be the start of many happy years spent enjoying your investment, however, many first-time homebuyers find themselves facing unexpected challenges or wishing they had made different choices.
read more
What happens to your home loan when the unforeseen happens?
Legal
What happens to your home loan when the unforeseen happens?
31 Oct 2024
Unforeseen life events like divorce, the death of a loved one, financial challenges, or a new partnership can turn even the most stable home loan into a stressful situation. Navigating a home loan under these conditions can be challenging, but understanding your options can help you make informed decisions and avoid unnecessary financial strain.
read more
Real Estate Tools
Get pre-qualified
Make offers with confidence knowing what you can afford. Then shop for the best home loan
Bond Calculator
Calculate the estimated repayments on a home loan and savings with extra payments