The only way that you can counter less competitive interest rates is to negotiate hard when looking for a home loan, Simon Stockley, the chief executive of SA Home Loans, says. You should also shop around for the best deal; don't settle for the first offer that you get.
Generally, the interest rate you are offered on your home loan will be based on your relationship with a bank and on the bank's assessment of how profitable you are to it, or how profitable you are likely to be to it, in the future.
Stockley says banks tend to put borrowers into two categories:
- Those borrowers who have a relationship with their bank and have one or more of the elite accounts. If you are one of these clients, your bank will currently offer you a discount of anything between one percent and 2.5 percent below the prime rate; and
- Clients who do not have a relationship with their bank. If you fall into this group, you can expect to be offered a discount of 0.25 percent to 0.5 percent on the prime rate. It is this group, in particular, that should negotiate hard, Stockley says.
Your biggest bargaining tools when shopping for a home loan are:
- The value of your loan in relation to the value of the property (called your loan-to-value ratio, or LTV). The higher the value of your share in the property you currently own or intend buying, the less likely you are to renege on your home loan repayments and consequently the less risk you pose to the bank.
A LTV ratio of 80 percent or less will put you in a good bargaining position. If you have paid off more than 20 percent of the value of your property, renegotiate your interest rate with your bank or consider moving your loan elsewhere (but take all costs into account before you do so).
Bear in mind that if you have been living in your property for a few years, its value may have risen dramatically. Ask the bank to revalue your property. When you buy a property, try to put in as much of your own money as possible because this will require a smaller loan.
- Your home loan repayments in relation to your income (payment-to-income ratio). The less of your income you spend on repaying a loan, the lower the risk you pose to the bank. Banks do not like you to spend more than 25 to 30 percent of your joint household income on repaying your loan. If you are in a position to pay less than this, you should negotiate for a better interest rate.
The biggest handicaps when shopping for a home loan are:
- A poor credit record;
- Being self-employed; and
- A low proportion, or none, of your own money in a property.
What you should know about home loans
- Don't move your home loan without assessing all the costs involved. It costs money to cancel one loan and initiate another with a different institution. Sometimes you can get discounts on these costs or they can be waived completely.
- If you have been paying off your home loan for several years, don't refinance your property over 20 years. What you will pay in interest over the 20 years will far outweigh the benefits of a marginally better interest rate.
- Beware of clauses in your loan agreement which give the bank the right to adjust the rate it offers you at its discretion. Banks often include a clause which states that a loan is granted to you at, say, a discount of two percentage points below the prime lending rate, but adds that it is at the bank's discretion and can be adjusted from time to time.
This means that the bank is not legally bound to honour the specific discount to you. Insist that the discount is included in the home loan agreement without the clause giving the bank further discretion.
- Remember that when interest rates are increased generally, your rate can also be increased but by no more than the adjustment to the prime lending rate.
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