Why do home loans abroad have lower interest rates than in South Africa?

By Isabelle Coetzee

You just found out that your friends who live abroad took out a home loan with an incredibly low interest rate, allowing them to settle the balance reasonably soon.

However, if you take out a home loan in South Africa, you can expect a hefty interest rate by comparison. We find out why there’s such a big difference between countries.

Tip: Find out what kind of interest rate you can expect for a home loan by clicking here.

The impact of inflation on home loans

According to Reagan Mitchell, managing director at WealthyMe, federal or reserve banks generally adopt a monetary policy which targets the rate of inflation.

“Emerging and developing countries tend to have a higher rate of inflation than advanced economies. Higher inflation could be the result of fast-growing economies, resulting in excess demand for goods and services. This causes exchange rate volatility,” says Mitchell.

He points out that emerging and developing countries’ currencies often depreciate against the currencies of advanced economies, which translates into higher prices for imported goods.

“As of October 2020, the inflation in the United Kingdom is 0.7% versus 3.1% in South Africa. By virtue of this, the interest rates on home loans will be higher in South Africa than the UK,” says Mitchell.

He explains that commercial banks across the globe borrow money at a set rate from their respective federal or reserve banks. To this, they add a margin when lending to a consumer.

“The Bank of England’s base rate is 0.10% versus 3.5% for the South African Reserve Bank. This means you can get a home loan in England priced at under 3% versus north of 7% in South Africa,” says Mitchell.

READ MORE: Is a home loan a great savings tool?

Costs to consider when taking out a home loan

Mitchell advises that when planning the purchase of a new home, you need to consider all associated upfront costs, as well as recurring monthly costs.

“You may need to pay a deposit on the property as well as property transfer costs. First-time buyers often don’t have this money available and end up borrowing. This, in turn, increases the recurring instalments,” says Mitchell.

He points out that in South Africa, the number one financial goal for consumers is to buy a home, therefore planning financially for this is crucial.

“It’s prudent to plan in advance for big purchases to avoid unnecessary loans to front the initial costs. Set a goal, research the area you want to live in, do your calculations, and then put together a savings plan. Don’t focus only on monthly home loan repayment. There’s more to consider,” says Mitchell.

These additional costs include:

  • Water and electricity fees
  • Rates and taxes
  • Maintenance costs
  • Property insurance
  • Home loan credit life insurance

“Only once these costs are calculated, together with the financing cost, will you have a realistic view of what your monthly costs for owning a home will be,” says Mitchell.

Get an estimate today of how much a home loan will cost you.

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