Getting to grips with interest rates when buying a home

Here’s some advice for home owners on how to get to grips with interest rates and whether to fix them or not when it comes to mortgages, as well as a look at what paying off a home loan earlier can save in terms of interest.

Buying a home is likely the largest financial decision most people will make.

Not only do buyers need to save up for a deposit, but they also need to calculate their monthly repayments – including interest when deciding to buy. But how does interest work?

Law firm Smith Tabata Buchanan Boyes explains that interest is 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 bond at 10.5% interest over 20 years. The monthly repayment will be R9 897.20, with a total repayment of R2 375 328 (and total interest repayment of R1 375 328) over 20 years, explains Bruce Swain, CEO of Leapfrog Property Group. The first best thing to do is to negotiate a low interest rate when purchasing a property.

“An expert mortgage originator can do a lot to help buyers get a good rate, but offering to put down a larger deposit can also make a significant difference in the rates offered (as the risk to the bank has been lowered),” advises Swain. “Fixing your interest rate on your home loan provides 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,” explains Swain. “My advice would be to only fix your interest rate if you need to be certain of your cash flow.” Regardless of income, it’s in everyone’s interest to pay off their home loan as soon as possible as it will save a lot of funds in terms of interest repayments, as well as securing a debt-free asset.

Pay in an extra R500 per month:

“Using the example a R1 million bond, if a homeowner pays in an extra R500 into their bond monthly, their total repayment over 20 years will go down to R2 144 942.36, with a total interest repayment of R1 144 942.