The ‘prime interest’ rate made simple
The interest rate that banks charge on home loans can be negotiated, provided you have a good credit history.
Silindile Leseyane has masses of experience when undertaking negotiations for finance for property acquisitions by the Sakhisizwe Property Stokvel, of which she is the founder. Part of her role is to ensure that her members understand all the aspects of a property journey and common terminology used. Her passion for property, however, extends beyond the stokvel, as she believes everyone has the right to a roof over their heads, and more so if that means ownership. As a result, she provides a number of workshops aimed at providing the public with knowledge.
One of the most recent workshops Silindile hosted was a discussion on the ‘prime’ interest rate, what it means, and how to apply for it.
Q: What is meant by the 'prime' interest rate?
The prime interest rate is the standard rate that commercial banks in South Africa use to calculate the interest on loans they offer to their most creditworthy clients. It serves as a benchmark for various types of credit, such as:
- Home loans (bonds).
- Vehicle finance.
- Personal loans.
When the Reserve Bank adjusts the repo rate —the rate at which it lends money to commercial banks—it directly impacts the prime rate.
Q: Why is it important to understand this in a property journey?
When the prime rate drops:
- Borrowing becomes cheaper. Monthly repayments on loans decrease, leaving you with more disposable income.
- New loans are more accessible. You can afford to take out larger loans without a significant increase in monthly repayments.
- Savings interest may decline, but for most people, the reduced borrowing costs outweigh this.
Q: How to make a case for a prime rate at a bank when applying for a home loan?
Understanding the prime interest rate is a fundamental aspect of any property journey. Whether you’re purchasing your first home, expanding your portfolio, or refinancing an existing bond, the prime rate determines how much borrowing will cost you.
Knowing how this rate works and what influences it can assist you in making informed financial decisions and negotiating better loan terms with banks. If you can demonstrate to a bank that you are a candidate for the prime rate, you will benefit from better repayment terms, which can save you thousands of Rands in interest payments (source).
How do you know if you are a good candidate for the 'prime' rate?
When applying for a home loan, presenting a strong case to the bank can significantly improve your chances of securing favourable terms such as the prime rate. You can achieve this by demonstrating financial stability by:
- Providing proof of steady income, such as payslips or business financials for self-employed individuals.
- Maintaining minimal debt obligations, which may affect your ability to repay the loan.
- Having a good credit score, which shows the bank that you are a low-risk borrower.
- Offering to pay a deposit, which reduces the overall loan amount and makes your application more appealing.
Q: How does a 'prime' interest rate impact your home loan repayments?
Banks use the prime rate for their low-risk customers, such as those with stable income, good credit scores, and minimal debt obligations. If you do not qualify for the prime rate, the banks may offer you prime + (plus), for example, prime plus 1%. This means that for prime, the interest rate will be 11.25%, and for prime +1%, it will be 12.25%.
A practical example of the implication of prime vs a prime +1% interest rate:
- A R1,000,000 bond at 11.25% over 20 years: the repayment is approximately R10,493 per month, whereas at prime +1%, the repayment would be R11,186—an additional R166,341 in interest over 20 years.
Q: Does your credit score determine whether you are a candidate for 'prime'?
Banks typically offer the prime rate to their most creditworthy clients. You may be eligible for the prime rate if:
- You have a strong credit score.
- You’ve shown consistent repayment history on previous or current loans.
- Your debt-to-income ratio is low, indicating that you can comfortably handle the loan repayments.
Q: Do you need to have had debt in the past, which has been well-handled, to qualify for prime, or might you qualify if you have never had debt?
While a good repayment history can boost your chances of qualifying for prime, it’s possible to qualify without a history of debt. If you’ve never taken on credit before, the bank may assess:
- Your income stability and consistency.
- Other financial factors, such as savings and asset ownership.
However, having no credit history may make it harder for the bank to gauge your reliability, so building a small credit record with well-managed debt can be beneficial.
Q: Three tips when seeking a ‘prime’ rate?
- Shop around for the best rates: Don’t accept the first offer. Compare rates from multiple lenders to find the most favourable terms.
- Consider fixed vs. variable rates: A fixed rate locks in your interest rate for a set period, providing stability but often at a higher rate, whereas a variable rate fluctuates with the prime rate, offering potential savings when rates drop.
- Plan for rate increases: While the current trend is a decline, interest rates could rise in the future. Ensure you can afford repayments even if rates increase. For existing loans, consider keeping the same instalment you were paying before the rate drops to save on interest payments and reduce the payment terms.
