Save hundreds of thousands in bond payments
With the recent two rate cuts in quick succession by the South African Reserve Bank, consumers are being encouraged to take advantage of their home loan repayments. Those who are fortunate enough to not have any financial worries during this Covid19 pandemic could save hundreds of thousands in bond payments if they want to.
The recent move by the South African Reserve Bank to reduce short-term interest rates by 2% will go a long way towards helping to ease the financial burden of those South Africans who are currently facing the challenges of having to pay back home loans despite receiving less monthly income.
But there’s another side to the interest rate reduction coin.
“Lower interest rates are a great opportunity for those who can take advantage of them,” says Thozama Mochadibane, Head of Customer Delight at Nedbank Home Loans.
“While it may not seem like much, a two percent drop in the interest rate charged on a home loan can equate to a significant monthly repayment saving.
For example, the monthly repayment on a bond of R1,5m at an interest rate of 10% is R14 475. When you reduce that interest rate to 8%, as the SARB has now done, the monthly repayment comes down to R12 546 – a monthly saving of almost R2 000.
And for those with a higher home loan, the saving increases significantly. So, a person who would have been paying back almost R29 000 a month on a R3m home loan at 10%, will now need to repay R25 000.
A significant saving of R4 000 per month.
“But, while these are excellent monthly savings, the real benefit of the 2% reduction in interest rates is truly unlocked for those who decide to keep on paying what they were off their home loans before the reductions took place.
“So, if the homeowners with the R1,5m and R3m home loans in the examples above told their banks to keep deducting the amounts they were repaying when the interest rate was 10%, they would literally end up saving hundreds of thousands of rand over the term of their loan,” says Mochadibane.
''Pay off your home loan much sooner''
And what makes the argument for maintaining your home loan repayments at their pre-rate-cut amounts even more compelling, is the fact that doing so will allow you to pay off your loan much sooner than the agreed 20-year term.
In both cases (the R1,5m and R3m loan), simply keeping your repayments at the amount that applied before the rate cuts would mean that you would pay off your loan in 176 months (14,5 years) instead of the original 240 months (20 years).
That leaves you with more than five years at the end of your home loan term to plough the money you would have been paying into your bond into something else, like a retirement annuity or a savings fund.Coetzee explains, “When you apply for a home loan, it is by default on the basis of a variable interest rate. Only once your bond has registered, can you apply for a fixed interest rate and then there is a strict time limit attached before the offer lapses.”
(repayable over 20 yrs)
Total interest paid at 10%
Total interest paid at 8%
(over 20 year loan term)
1 974 078
R1 511 184
R3 948 156
R3 022 368
“When one considers these potentially massive benefits that can be achieved, simply by keeping your home loan repayment at the amount it was before the interest rate cuts, it would be unwise for anyone who is in a position to maintain their pre-rate-cuts level of repayments to choose not to do so, just for the sake of gaining a few thousand rand on their monthly budget in the short term.
“And if the potential for further monetary policy easing materialises in the future, as the SA government takes additional measures to protect the country’s economy, continuing this policy of paying the higher monthly amounts off your home loan will be a significant investment in your long-term financial wellbeing,” says Mochadibane.