In a high interest rate environment, securing a lending rate below prime (currently at 10.75%) from the bank is the most crucial step in the home buying process.

“Securing a lower lending rate, also known as an interest rate, has a significant impact in lowering the cost of your home loan over the entirety of the loan term,” explains Jackie Smith, Head of Buyers Trust, a safe and secure bank-hosted deposit solution for homebuyers and subsidiary of ooba Group. “The primary benefit of a lower lending rate is lower monthly repayments. The reduced monthly repayment also gives you the opportunity to put more money into your home loan each month so that you pay your bond off sooner.”

The first step in securing the best rate possible is understanding how banks determine lending rates. Each bank has its own lending criteria, but their decision takes into account the current repurchase (repo) rate and the homebuyer’s individual credit risk profile, that is their credit score and lending history.

Once a buyer has taken the necessary steps to boost their credit score, Smith explains that one of the best ways to secure a better rate is to put down as large a deposit as possible.

“Putting down a deposit (usually 10% of the purchase price) not only increases your chances of home loan approval and gives you immediate equity in the property, but also helps to secure a better lending rate. This is because the banks consider you less of a risk as you’ve demonstrated your ability to save and put money towards your purchase.”

The higher the deposit, the lower your rate will be. A large deposit also lowers the Loan-To-Value (LTV), which is the ratio between the loan amount and the value of a property and is something that the banks place considerable emphasis on when determining lending rates.

“Once you have made the decision to put down a deposit, be sure to give it the highest level of protection by storing it in a secure and interest-bearing account by using a third-party platform such as the one offered by Buyers Trust,” she adds.

The buyer is free to negotiate

Homebuyers should keep in mind that the lending rates offered are not final and absolute – these can be renegotiated until both the buyer and the bank are satisfied.

Smith explains that many homebuyers are not aware that you can approach a bank to negotiate for a better rate if you are unhappy with the rate you are first presented with.

She shares her top four tips for negotiating a lower lending rate from the banks:

• Do your research.

Before you begin the negotiation process, it’s important to have a thorough understanding of the current lending rates in the market by applying to multiple banks so that you can compare offers. Using a bond originator is a free and easy way to do this but you can also apply to multiple banks on your own.

“This can give you leverage when negotiating with your bank and help you identify if you’re getting a fair deal,” says Smith. “It also shows that you’ve done your homework, which makes you appear more credible and professional to the banks.”

• Leverage your credit score

The average credit score in South Africa is between 583 and 613 and a score of at least 610 is required for the banks to consider your home loan application. However, as credit scores go up to 850, it is possible to use your excellent credit score to your advantage when negotiating for a lower rate. If the score is lower than 681, it is recommended that an applicant spends the next 6-12 months taking the necessary steps to boost their score before trying again.

“The better your credit score, the lower your risk profile and the likelier you are to achieve an excellent rate. Be sure to take steps to boost your credit score as much as possible before starting the home loan application and negotiation process as this is the first thing they will consider.”

• Be prepared to walk away

If your first-choice bank isn’t willing to budge on their lending rate, be prepared to walk away and consider other offers. “Sometimes, this can be the best way to get the bank to come back with a better offer – remember that we are in a competitive lending environment and banks are actively competing with each other to secure home loan business.”

• Make use of a bond originator or mortgage broker to negotiate on your behalf

Finally, if you’re hesitant to negotiate with the bank yourself, enlist the services of the bond originator if you used one for your home loan application process. “These consultants have an expert understanding of all the lending rates from the country’s major banks. They will use their close relationship with the bank to negotiate a competitive rate on your behalf, free of charge.” A mortgage broker performs a similar service, but for a fee.

“Negotiating with a bank for a lower lending rate may seem like an intimidating task, but the rewards are high,” Smith concludes. “Remember that there’s no risk to your application – the bank won’t rescind the application if you ask for a better rate. The worst-case outcome is that they say no, and you may need to do some extra legwork in applying with other banks for a better rate. But it’s worth it in the end, when you’ve saved thousands on your monthly repayments.”

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