Pay extra into your home loan

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Now that interest rates are in an upward cycle, homeowners should think seriously about paying extra into their bonds each month, and take stock of their expenses and disposable income.

Following a fully subscribed event hosted by the Institute of Estate Agents, Western Cape, at the BOE Centre in Paarl, where one of the key speakers was Nicola Weimar, Nedbank Property Analyst there were a few key points in Weimar’s presentation that Annette Evans, regional general manager for the Institute felt should be brought across.

Weimar’s presentation showed clearly how slower growth in the public sector, tighter conditions in the private sector and higher inflation are containing growth in disposable income by tracking consumer spending and disposable income trends over the last ten years.

2006 saw the highest consumer spending levels and healthy disposable income ratio, whereas in 2014, they are more or less on par with the second quarter of 2003.

Evans says one of the most important things is that the economy is contracting and interest rates are sure to rise again.

The banks, according to Weimar, will always be keen to provide home loans because it is a responsible asset to a responsible client, as opposed to short-term loans which would usually be for depreciating assets such as cars.

“We do not know by how much and when, but the one thing that is sure is that interest rates will rise over a period of time. I would advise that people look at the debt to income ratio in their own households, which in South Africa at 75 percent at present, is too high. What homeowners should be doing now is freeing up cash to pay off their bonds quicker. It is better to pay extra into your bond now, and pre-empt the interest rate increases than to wait until the increases and then have to pay the higher amounts each month.

“What many people don’t realise is that even if they pay R500 or so extra per month, they can take years off their bond. If you add up extra amounts over the years, saving interest shortens the payback period because the first ten years the bond payer is paying interest alone and the sooner one can get to paying the capital amount back, the better,” she says.

In a simple calculation, on a bond of R500 000, at 10 percent interest with no deposit over 20 years, the repayment is R4 825.11 per month, and the total interest over the loan term comes to R658 025.97. If the bondholder pays just R500 extra per month, it reduces the loan by five years and the total interest is only R 478 778.93.

Evans says the Institute is constantly striving to keep estate agents abreast of changes to legislation and updating them on trends and factors that could influence the property sector, which in turn helps the public by ensuring that they are dealing with a person with a good understanding of their industry.

“In addition, agents will now also receive Continuing Professional Development (CPD) points for certain events run by the Institute, which the Estate Agency Affairs Board has stipulated each agent must accumulate on a yearly basis.”

The Institute will also be running consumer awareness courses on property ownership, where attendees will be coached on matters such as these.

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