Why the interest rates really matter

One small number can make a massive impact on your overall financial wellbeing. While you might think it insignificant, interest rates actually play a crucial role in determining the cost of your home loan and can significantly impact your monthly repayments, total loan cost, and overall financial security.

Read: First-time homebuyers' fears - how to overcome them

According to Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa, many buyers overlook the importance of maintaining a good credit score to obtain the lowest possible interest rate on home financing. “Rather than focusing on which bank offers you the highest possible credit amount, focus on the bank that offers the best interest rate, as this will have the largest lasting impact on your finances,” he advises.

How do interest rates affect your finances? At the most basic level, higher interest rates mean higher monthly repayments, making it more expensive to service your bond. But, over a 20-year or 30-year loan term, even a small difference in the interest rate can result in paying hundreds of thousands of rands more in interest.

To illustrate just how much an interest rate can affect your finances, let’s use an example of a R1,000,000 loan taken over 20 years at an 11% interest rate compared to a 12% interest rate. Just this 1% increase in interest results in R690 more per month. Over 20 years, you pay an extra R165,354.58 in interest alone.

SEE | Property24 101 - Buyer and Seller specific advice 

According to Goslett, securing a lower interest rate at the initiation of your home loan is incredibly important, especially when you understand how the amortization process works. “This is the process of gradually paying off a loan through scheduled monthly payments that cover both interest and principal. In the beginning, a larger portion of your payment goes toward interest, while a smaller portion reduces the principal. Over time, as the principal decreases, the interest portion decreases, and more of your payment goes toward paying off the loan balance,” he explains.

Because interest is calculated on the remaining balance, Goslett explains that at the start of the loan, the outstanding balance is at its highest, meaning interest charges are also at their highest. Each time you make a payment, your principal balance shrinks slightly, which also means that the interest portion of your payment gets smaller over time. It is only roughly fifteen years into your loan term that you start paying more towards the capital amount than you do towards the interest.

“Understanding how this works helps buyers to understand how making extra payments early into the loan term can significantly reduce the total interest paid and shorten the loan term. It also helps to understand how significant of an impact it makes when the SA Reserve Bank lowers or raises interest rates for the country,” he notes.

“Ultimately, understanding how interest rates work will help you make informed decisions when taking out or managing a home loan. If you are unclear about anything, set up an appointment with a financial advisor or a bond originator to help gain a better understanding. Once you are ready, reach out to a RE/MAX agent to start hunting for a house you can truly afford,” says Goslett.

SEE | Property24 101 - Buyer and Seller specific advice 

Pam Naidu, Director of Sales and Marketing at Devmco Realty, shared some key learnings, in an article published on 11 May 2023, which every first-time buyer should know when deciding to purchase their dream home.

1. Location, location, location! Also known as the Three L’s:

There are three micro locations that define the actual location of a property on a macro level. If the property you want to purchase is in an estate for example, you may want to find out what area of the estate it sits in and what that actual area provides, such as a good sea views, etc.

2. Financial stability is important:

Get your credit card payments and debts in order.

3. Budget:

Establish a realistic budget to determine your affordability. Create a budget and try to stick to it so that you can enjoy the process and not put yourself under too much pressure.

4. Find a trustworthy real estate agent:

This is the person that will assist in picking out your potential home and exploring your new neighborhood and is also responsible for scheduling tours and negotiating important contracts on your behalf. Ensure that this is someone you trust, to have your best interests at heart.

5. Get approved:

Get a pre-approval letter before you start shopping! This will help you have realistic expectations on what you can afford.

6. Be mindful of transfer and closing costs:

First time buyers usually tend not to factor these costs in, and it comes as a huge surprise at the end. Doing your homework is a very vital part of house hunting.

Becoming a first-time homeowner can be an overwhelming experience and requires careful consideration of several factors. With the expert advice from Devmco Realty, first-time home buyers can make an informed decision and successfully unlock the door to their dream home. 

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