Home loans and interested payable
Consumers must understand that interest is the fee a lender charges for lending money to a borrower.
After the steady rise in interest rates, many South Africans might have had a crash course on how severely interest charges can affect their monthly budgets.
“Interest rates can fluctuate from time to time, so it is important to know what this means for your monthly expenses, especially for the big-ticket items like home loans, vehicle finance agreements and credit cards,” said the regional director and CEO of RE/MAX of Southern Africa, Adrian Goslett.
Consumers must understand that interest is the fee a lender charges for lending money to a borrower.
“It is vital to know that interest is purely an expense. When you buy on credit, the corresponding interest charges mean you will pay double, if not triple, the original amount.
“That is why it is better to minimise your lines of credit as far as possible and only take on good debts, such as home loans, rather than bad debts like a car loan or store account,” Goslett explained.
To understand why all debt repayments have become more expensive over the last year, consumers should understand the South African Reserve Bank (SARB) meets every second month to decide whether to change the country’s interest rates to combat inflation.
“When the repo rate changes – up or down – so does the prime rate by the same percentage. This, in turn, affects all your monthly repayments,” Goslett explained.
Anyone with a home loan will notice the interest payable is included in your monthly repayment amount, so you don’t have to do the calculation yourself.
But, if you want to prepare yourself ahead of time, you can use an online calculator for an indication of how much more your monthly repayment amount will be.
If you are interested in finding out how much interest you will pay for the duration of your loan, know it is tricky to calculate because the amount is based on the outstanding balance of your loan and its remaining period.
This is known as compound interest and means the amount you owe the bank increases daily.
“There are several online calculators to help consumers calculate the interest on their home loan. For example, BetterBond has an amortisation or repayment calculator that shows how repayments are structured for the capital and interest amounts you will ultimately pay.
“This can be a helpful tool to help homeowners visualise how much they could be saving by paying a little extra into the home loan each month,” said Goslett.
He added that if, when you start paying your loan, you pay more than the minimum amount, it will reduce the amount of interest you pay over the years. It also reduces the loan’s term over which you will pay and saves you money.
“When the bank structures your repayments, they do it so that over the first few years, most of the monthly repayment goes to paying off the total interest and only a fraction to the capital amount (the actual price you paid for the property).
“If you focus on paying extra into your home loan in the first 10-odd years of the loan term, you can maximise your savings on interest charges,” Goslett explained.
Those still unsure how interest rates work are encouraged to speak to a financial advisor for further insights.
“You do not want to get into a situation where you do not fully understand the implications of taking on credit.
“While you might need to take on a certain level of debt to build future wealth, it should only be based on what you can actually afford.
“Once you have worked that out, speak to a real estate professional to find out what homes are available in your price range,” Goslett concluded.
