How to make the most of the reduction in prime lending rates and pay off your home loan quicker than you thought.
The recent Reserve Bank decision to reduce the repo rate to 6,5% per annum was well received by the majority of stakeholders in the property industry. This means that homebuyers and homeowners benefit from the reduction in prime lending rates, and although the 0,25% seems negligible, it adds up to quite a substantial amount over a 20 year period.
“We feel that the biggest benefit of the reduction,” says Meyer de Waal, director of MDW Inc, and co-founder of the Attorney Realtor Hub, “is that is has created a more positive sentiment in the property industry, which has filtered through to all stakeholders: estate agents, bond originators, sellers, buyers, and current property owners.”
The past 18 months have been slow for property sellers and estate agents. Many attributed this to “a wait and see” on the outcome of the 2019 National General Elections”, says de Waal.
The question is now, however, “Do I cash in now and pay less on my home loan?”.
De Waal says, “No, it’s best to continue paying what you were paying, and where possible, pay a little extra on top of that amount (such as year-end when you get a performance or end of year bonus.”
On a 20 year bond of R600 000 at a payment calculated on 10,25% interest, the monthly repayment was R 5 889 per month. On an interest rate of 10% over the same repayment period, the monthly repayment is R5 790, a saving of R99 per month.
An extra monthly payment of R99 per month, with a remaining repayment period of 15 years of the 20 year home loan (as an example) will reduce the home loan repayment by six months and save the property owner R23 128 in total.
For a mortgage of R1 million, the savings per month will be R166 per month. On a home loan of R1 000 000, an extra monthly payment of R166 per month, with a remaining repayment period of 15 years of the 20 year home loan will reduce the home loan repayment by six months and save the property owner R38 771 in total.
For new property buyers, “Affordability” is one of the key components to raising a home loan and the reduction in the interest rate will mean more buying power for the home buyer.
If you earn R20 000 per month, with an interest rate of 10.25% and calculated over a 20 year term, a home buyer may qualify for a home loan of R611 219.
At an interest rate of 10%, the same income ought to raise a home loan of R621 747, thus R13 528 more “purchase power”.
An income of R35 000 per month with a 10,25% interest rate raises a home loan of R1 069 634 and at 10% will raise a loan of R 1 088 058, thus, R18 424 more.