Don't Let an Interest Rate Cut Mean a Decrease in your Mortgage Repayment
It came as some relief to homeowners when the prime interest rate was cut by 50 basis points to just 8.5% last month. Although this provides a welcome reduction in the monthly costs of repaying a mortgage, ooba, the South African home loan experts, say it would be wise for people to keep their repayment levels unchanged.
"When the interest rate gets cut, it's easy to start thinking of ways to spend those extra rands, but in reality, its never a bad idea to invest that money in your home loan," says Craig Deats, ooba sales director.
"A mortgage is a big financial burden and every effort should be made to reduce it." While a couple of hundred each month may not seem like enough to make a dent in a large mortgage, over time the savings can be significant. Deats shows that the maths bears this out.
On a R1 million home loan with an interest rate of 9% the monthly repayment is R8 997 over 20 years. When the interest rate is reduced to 8.5%, the monthly repayment is R8 678 - a reduction of R319. "If you were to take that R319 and keep paying it into your home loan account every month from the start, you would reduce both the total interest charged and the term of payment significantly," he says.
"You would save yourself R109 835 on the total amount repaid, and would finish paying off the mortgage in just over 18 years." The more you pay, the more you save Naturally, the more you can put into your home loan, the greater the savings and the shorter the term. "It makes sound financial sense when you have extra money to invest some into your home loan," says Deats.
There's another very good reason to increase your monthly mortgage payments to more than the required amount. While the going may be good right now, this is the lowest that the prime interest rate has been in 38 years, but at some point it will start to rise again. In a household with an extremely tight budget, a sudden increase in repayments can be tough to cope with.
"By paying in extra, you are creating a buffer so that when the interest rate does go up, you don't take a financial knock in meeting the new repayments," says Deats. "Over time, you can find a way to stretch yourself a little bit further again, but by already paying in extra, you can take a little more control of your financial situation from month to month."
The message is clear that reducing the interest paid and the term of payment on a mortgage should be the goal of any homeowner. This is achievable even at just a few extra hundred rand a month. "The repayment rate set by your bank should only be viewed as the minimum you have to pay," says Deats. "A wise financial decision would be to pay in more than the required amount every month."
To work out exactly how much of an overall saving you would gain in your specific circumstances, try out our bond affordability calculator.