Home loan interest rate increase: what happens to your application?

Article insights:

• Home loan interest rate increases can affect your home loan application: if prime rises before formal approval, your bank may calculate your loan at the new rate, which could increase your monthly bond repayment.
• Home loan affordability may be reassessed: banks can rerun affordability checks when there is an interest rate increase, potentially resulting in a lower approved loan amount, a larger deposit requirement or a declined application.
• Protect yourself against higher bond repayments: buyers should consider leaving a 10–15% affordability buffer and stress-testing repayments at higher interest rates before committing to a property.
• Compare home loan rates to secure a better offer: applying to multiple banks through a bond originator can help you access competing offers and negotiate a lower interest rate or rate concession. BetterBond buyers receive an average interest rate concession of 0.65% when applications are negotiated with four banks.
• Act early if your home loan becomes unaffordable: options can include reducing the loan amount, increasing your deposit, extending the repayment term, refinancing or negotiating with the seller. Existing homeowners should contact their lender before falling into arrears.

Applying for a home loan can feel like the final step towards owning your new home. But what happens if interest rates change while your application is still being processed?

It is a common concern for homebuyers, particularly when interest rates are moving. A change in the prime lending rate can affect the interest rate offered by a bank, your monthly bond repayment and, in some cases, the amount you can afford to borrow. The good news is that you have options. Understanding how interest rate changes can affect your application can help you make a more informed decision and avoid stretching your budget too far.

What happens if interest rates increase while my home loan is being processed?

If the prime lending rate increases before a bank has issued its formal home loan approval and offer, the bank may price your loan at the new, higher rate when it makes its offer. For example, you may have applied for a home loan when prime was lower, only for the rate to increase before your application reaches final approval. The bank may then calculate your proposed repayment using the new rate.

However, if you already have an approval that specifies a particular interest rate, the bank will generally honour that rate for the validity period of the approval, provided there are no material changes to your application or financial circumstances.

Once your home loan has been registered, your repayment will depend on the type of interest rate attached to your bond. With a variable interest rate, future changes in prime will affect your monthly repayment. This is why it is important to look beyond the repayment you are quoted today and consider whether you could still afford the bond if rates were to rise.

Will the bank reassess my affordability with an interest rate increase?

Yes. Affordability is a key part of the home loan approval process. If the interest rate used to assess your application changes before final approval, the bank can rerun its affordability assessment using the new rate. This is part of responsible lending and the requirements banks must follow under the National Credit Act. Banks look at factors such as your income, monthly expenses, existing debt and credit profile when determining whether you can afford the proposed repayment.

Many lenders also build a buffer into their affordability assessments by stress-testing applications at rates above the quoted rate. This helps determine whether you could continue making your repayments if interest rates increase further. The important point for buyers is that your initial home loan pre-approval or estimated affordability is not necessarily a guarantee of the final loan amount.

What if my original pre-approval was based on a lower interest rate?

A pre-approval is usually valid for a limited period, often around 90 days, after which your affordability may need to be recalculated.

If interest rates have increased during that period, the bank may reassess the application at the prevailing rate. If the higher repayment means you no longer qualify for the original loan amount, the bank could:

• Approve a lower loan amount.
• Ask for a larger deposit.
• Consider a longer repayment term.
• Approve the original amount if you still meet its affordability requirements.
• Decline the application if you no longer meet the affordability criteria.

This is one reason why it can be sensible to buy below your maximum pre-approved amount rather than treating that figure as your target budget.

What if I can no longer afford the approved loan?

You may still have several options. One is to reduce the amount you borrow. A smaller bond means a lower monthly repayment and may bring the loan back within your affordability range. Another option is to put down a larger deposit. This reduces the amount you need to borrow and lowers the loan-to-value ratio, which can also improve your risk profile with the lender. You could also consider extending the repayment term. For example, moving from a 20-year to a 30-year term can reduce your monthly repayment. However, you will pay more interest over the full life of the loan, so this decision needs to be considered carefully.

It may also be worth approaching another lender. This is where using a bond originator can be particularly valuable. Different banks assess risk differently and may offer different interest rates or concessions based on your individual circumstances. At BetterBond, we apply to multiple banks on your behalf and negotiate with lenders to secure the most favourable rate available to you. On average, when BetterBond applies to and negotiates with four banks, buyers receive an interest rate concession of 0.65%.

Even a relatively small reduction in your interest rate can make a meaningful difference to your monthly repayment. If the loan is no longer affordable and none of these options work, you can also cancel the application by notifying the bank.

Can I renegotiate the purchase price with the seller?

Potentially, yes. If an interest rate increase means the property is no longer affordable, you can approach the seller and ask whether they would consider reducing the purchase price. However, this depends on the terms of your Offer to Purchase (OTP), particularly the bond or finance suspensive condition.

If your OTP is still subject to obtaining a home loan for a specified amount and that condition has not been met by the deadline, the agreement may fall away depending on the wording of the contract. You could then choose to walk away from the transaction, subject to the terms of the OTP, or negotiate a lower purchase price with the seller. For example, you might agree on a lower purchase price, reduce the size of the bond and contribute additional cash, or negotiate an extension to the relevant deadlines. However, if the bond condition has already been fulfilled or waived, the situation is different.

Once a buyer and seller have signed an OTP, it is generally legally binding. If the finance condition has been fulfilled and you later decide that the repayments are unaffordable, affordability on its own would not generally give you an automatic right to cancel the agreement. There can be significant financial and legal consequences if you cannot proceed with a signed property transaction. Depending on the circumstances and the terms of the OTP, the seller may be able to cancel the agreement, retain or claim the deposit, or potentially claim additional damages. If you find yourself in this position, get appropriate legal advice before taking action.

How much should I budget for future interest rate increases?

One of the best ways to protect yourself is to avoid borrowing right up to your maximum affordability. Rather than looking only at what you can afford at today’s interest rate, consider what would happen if your repayment increased. As a general budgeting approach, it can be useful to leave a buffer of around 10% to 15% above your expected bond repayment. This gives you some breathing room if rates rise or your other household expenses increase. You can also use a bond repayment or affordability calculator to test different interest rates before committing to a property.

For example, if your expected repayment is R15,000 a month, don’t only ask whether you can afford R15,000. Ask whether you could cope if the repayment increased to R16,000, R17,000 or more.

That simple exercise can give you a much clearer picture of whether a property is genuinely affordable. A deposit can also help. BetterBond recommends considering a deposit of at least 10%, where possible. A larger deposit reduces the amount you need to borrow and can improve your chances of securing a home loan and a competitive interest rate.

What if I already have a home loan and can no longer afford the repayments?

If you already own a home and an interest rate increase has made your bond repayment difficult to manage, don’t wait until you miss a payment before taking action. Contact your lender as soon as possible and explain your circumstances. Depending on your situation, your lender may be able to discuss options such as extending the repayment term or temporarily reducing your repayments. If you have had your home loan for several years, it may also be worth investigating whether you could refinance at a more competitive rate.

This is another situation where a bond originator can help. If your financial circumstances or credit profile have improved since you took out your original bond, approaching multiple lenders could help you find a better rate or rate concession. Most importantly, don’t simply stop paying your bond. Falling into arrears can negatively affect your credit record and make your financial situation more difficult to resolve.

As a last resort, if the home is genuinely no longer affordable, selling the property may be preferable to waiting until the bank takes legal action. If you are considering this route, seek professional advice early. A bank-assisted sale may provide a better outcome than allowing the property to reach a forced sale or auction. If a property is sold for less than the amount owed to the bank, you can remain liable for the shortfall.

The bottom line: don’t borrow based on today’s rate alone

Interest rate changes are an important part of buying a home, but they don’t necessarily mean your homeownership plans have to stop. The key is to understand what you can comfortably afford, rather than simply borrowing the maximum amount a bank is prepared to offer. If rates rise while your application is being processed, your affordability may be reassessed and your final loan amount or repayment could change. If that happens, you may have options, including reducing the loan amount, increasing your deposit, extending the repayment term or approaching another lender.

The best approach is to plan for some movement in interest rates from the beginning. Leave room in your budget, stress-test your repayment at a higher rate and get professional guidance if your circumstances change.

And remember: the goal isn’t simply to get your home loan approved. It’s to make sure you can comfortably afford your home long after the paperwork has been signed.