Banks offer several different home loan rate options to ensure that you are able to manage your home loan repayments. Each bank has different options and may even call these options by different names. Below is a comparison of the most common options:
Variable rate
Description: Linked to the prime lending rate, it is subject to fluctuations.
When to opt for this option: If you believe that interest rates are going to fall in the near future. If you are not too concerned about increases in the interest rate.
Advantages: When the interest rate is low, your risk is low. At an initial low interest rate, you can borrow more.
Disadvantages: When the interest rate goes up, your repayments go up. This increases your risk.
Fixed Rate
Description: The interest charged on a home loan account remains the same, for a certain period, regardless of market conditions. All banks have different terms and conditions regarding this period.
When to opt for this option: If you believe that interest rates will rise in the near future. If you need to plan your monthly budget very carefully.
Advantages: Protection against a rising interest rate (and higher repayments) for a specific period. It provides stability and peace of mind. It makes budgeting from month to month easier.
Disadvantages: You are contractually bound for a specific period to pay the fixed rate, even if interest rates fall. You are at risk of additional finance charges, should you decide to terminate this option. When you enter into a fixed rate agreement the bank borrows the applicable amount at a given rate from the Reserve Bank, which is set aside for the period of the agreement. If you want to withdraw from the agreement, it creates a problem in that the bank still has to pay for those selected funds for the remainder of the period. This is why a fee is charged to compensate for the losses that the bank suffers in income.
Capped Rate
Description: Your home loan Rate will not increase for a certain period, above a set maximum rate, regardless of increases in the Interest Rate above this 'cap'. You however, still enjoy the benefit of decreasing Interest Rates. All banks have different terms and conditions regarding this period and this rate is usually accompanied by a premium your bank will charge you for the Capped Rate.
When to opt for this option: If you believe that interest rates will rise in the near future. If you need to plan your monthly budget very carefully. If you are not too concerned about the premium your bank will charge you for the capped rate.
Advantages: Protection against rising interest rates (and higher repayments) for a specific period. It provides stability and peace of mind. It makes budgeting from month to month easier.
Disadvantages: The rate applies to your full loan amount, not to the outstanding balance. A premium is payable for a capped rate, which is debited to your home loan amount, increasing your outstanding balance, on which interest is charged.
What is a Rate Concession?
The Prime Lending Rate is also known as the Base Home Loan Rate. You may qualify for a home loan at:
- the Prime Lending Rate;
- a rate below the Prime Lending Rate, which is a Rate Concession; or
- a rate above the Prime Lending Rate; depending upon your credit profile (according to the banks evaluation of your financial situation).
If, for example, your bank's prime lending rate is 9% and you qualify for a home loan with a Home Loan Rate of 8%, your rate concession on the loan is at 'prime less 1'. If you qualify for a 11% home loan rate, it is at 'prime plus 2'.
This article originally appeared in Property Power 11th Edition Magazine. To order your copy at the discounted price of R120 click here.
