Buying a home is probably the biggest financial decision most people will ever make.
Not only do you need to save up for a deposit, but you also need to calculate your monthly repayments – including interest – when deciding to buy. But how does interest work?
It is all calculated on the principal amount. If the bank/mortgage lender advances a buyer R1 000 at 10% per annum, it will earn 10% interest after 12 months, and in the next year, the same amount. By the same token, if you are the borrower, you will pay R100 interest in the first year, and a further R100 interest in the next year.
“For a practical real estate example, take a property with an asking price of R1 million, and a bond at 10,5 per cent interest over 20 years. The monthly repayment will be R9 897,20, with a total repayment of R2 375 328 (which includes the total interest repayment of R1 375328) over twenty years,” explained Bruce Swain, CEO of the Leapfrog Property Group.
How do you get the best rate?
The first thing to do is to negotiate a low interest rate when purchasing a property. Try using an expert mortgage originator as they can do a lot to help buyers get good rates. It is also very important to know that a larger deposit can make a significant difference to the interest rate offered.
Variable versus fixed
With the future of the South African economy in flux at the moment, there is an excellent chance that the Reserve Bank’s Monetary Policy Committee will elect to raise interest rates over the coming months (especially since South Africa has been downgraded to junk status), prompting many home owners to consider fixing their interest rates.
“Fixing the interest rate on your home loan does provide additional security during uncertain times – allowing for greater cash flow certainty – however, if the interest rate drops during that period, the home-owner would actually have been better off not fixing it”, explained Bruce. “My advice would be to only fix your interest rate if you need to be certain of your cash flow”.
Paying off your home loan faster
Regardless of income, it’s in everyone’s interest to pay off their home loan as soon as possible, as this will save a lot of money in terms of interest repayments, and secure a debt-free asset.
Pay in an extra R500 per month:
“Let’s use the example quoted above of a R1 million bond @ 10,5 per cent over 20 years, with a monthly repayment of R9 897,20, equalling a total repayment over 20 years of R2 375 328.
If a homeowner pays in extra R500 a month into his bond (i.e. R10 397,20), the total repayment over 20 years will decrease, to R2 144 942,36, which includes a total interest repayment of R1 144 942. The homeowner will thus save R240 386 and pay of his property almost 3 years sooner”, explained Bruce.
Paying in an extra R1 000 per month:
Bruce explained further that if the homeowner pays in an extra R1 000 per month, i.e. R10 897,20, the total repayment over 20 years will drop to R1 988 739 (with the total interest payable amounting to R988 739). Doing this will save the homeowner R386 589 and he’ll pay off his property almost 5 years sooner.
“It makes sense to pay off a property as soon as possible, not just in terms of the interest saved, but also in terms of being able to use that property to generate more income by getting a loan for further studies, investing in more property and the like”, Bruce concluded.
Do you perhaps have more information pertaining to this story? Email us at randfonteinherald@caxton.co.za (please remember to include your contact details in the email) or phone us on 011 693 3671.
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