Why your interest rate matters more than your purchase price when buying a home

For most South Africans, a home loan is the biggest financial commitment they will ever make. And while it’s easy to focus on the purchase price or monthly instalment, your interest rate is what truly determines the long-term cost of your home.

With another interest rate decision expected this week, understanding how rates affect your home loan, from the moment you apply to years into repayment, is essential.

How interest rates impact your home loan

At its core, your interest rate is the cost of borrowing money from the bank. It determines how much you pay over and above the purchase price of your home.

When rates are lower, your monthly repayment is lower, you pay less interest over time, and homeownership becomes more affordable. However, when rates increase, your monthly repayment goes up, a larger portion of your payment goes towards interest, and your long-term costs increase

This is why interest rates are one of the most important factors to consider when buying property.

Before you sign: where your interest rate is determined

Your interest rate journey starts before you even make an offer.

When applying for a home loan, banks take a full view of your financial position, looking at your income and expenses, your credit score, the size of your deposit, and your overall risk profile. This assessment determines how your loan is priced.

Based on this, you may be offered a rate below prime (the ideal outcome), at prime, or above prime if you are considered higher risk.

The stronger your financial profile, the better your chances of securing a more favourable rate. This is why a larger deposit can make a meaningful difference, as it reduces the bank’s risk and your loan amount. A solid credit record also improves your pricing, while comparing offers from different lenders can help you secure a more competitive deal from the start.

How interest is actually calculated over time

Home loans in South Africa use an amortisation structure, which means:

• Your repayment includes both capital and interest
• Early payments are mostly interest-free
• Later payments shift more toward paying off the loan amount

In simple terms:

• At the start of your bond, you’re mostly paying the bank
• Over time, you start building more equity in your property

This is also why making extra repayments early can make such a big difference.

The real impact of interest rate changes over time

Even a 0.5% change in your interest rate can make a meaningful difference. Here’s an example based on a R1.5 million property with a 30% deposit:

The key takeaway: small rate movements today can translate into significant long-term cost differences.

Fixed vs variable: choosing the right option

When taking out a home loan, you’ll typically choose between a variable or fixed rate. The most common choice is a variable rate, but you should base your decision on what will work best for your financial situation. Speak to a bond expert before you make the choice. 

Variable rate

A variable rate moves with the market, meaning it responds to changes in the repo rate. This could offer you some relief when rates are lower, but this flexibility also means that when we are on an upward trajectory, your rates will increase. You need to ensure that you are able to still repay your home loan when this happens. It is therefore vital to do all the necessary checks before you start thinking about buying a home and consider a bigger deposit. This is also why most estate agents would advise you not to buy a home at the maximum bond you are approved for, as this means that when times get tough, you are more vulnerable to rate increases. 

Fixed rate

On the other hand, a fixed rate means that your repayments stay the same for a set period. This helps with budgeting and financial planning as you know what to expect each month for the foreseeable future. When the rates increase, you know that you are safe from higher repayments, but this also means that you can't enjoy the benefits of a lower repo rate. Fixed rates are also usually higher than variable rates, but if your financial situation would benefit from this, it is definitely an option to consider. 

Managing your home loan as rates change

Interest rates don’t stay the same over a 20-year period — and your strategy shouldn’t either.

Some practical ways to manage your home loan include:

• Making extra repayments when rates are lower
• Keeping your credit profile strong
• Reviewing your loan if better rates become available
• Building a buffer for potential increases

Because interest is calculated on your outstanding balance, every extra payment reduces the interest you pay over time. 

What to expect from the next interest rate decision

With the Reserve Bank’s next announcement expected this week, there are three possible outcomes:

• Rate cut: Lower repayments and improved affordability
• Rate hold: Stability for homeowners
• Rate increase: Higher repayments and tighter budgets

While recent trends have shown some easing, the direction will depend on inflation and broader economic conditions. For the most part, staying ready and ensuring that you can handle the new repayments either way, is the best for your long-term financial health.