Use interest rate cut to slash your home loan – and other big debts

The recent 50 basis point repo rate cut announced by the South African Reserve Bank gives many homeowners a little wiggle room, even in these very challenging times, says John Manyike, Head of Financial Education at Old Mutual.

“The rate cut will leave homeowners with some surplus cash, providing some much-needed relief, given the economic constraints caused by Covid-19,” he says, “But while the additional cash may come in handy during these tough times, homeowners need to consider maintaining their home loan repayments at pre-rate cut levels. Depending on how long you maintain the additional payments, doing this could significantly reduce the total interest you pay and shorten the loan repayment term.”

Manyike’s message to homeowners is simple: take a long-term view of the benefits of the rate cut to maximise its positive impact on your finances, especially if you can afford to pay a little bit more than what is required.

Here is an example that illustrates the benefits of paying extra on your home loan:

 

Property Price	Loan Amount + interest	Monthly Instalment	Interest Rate	Loan Term	Total Paid to Loan
1 000 000	R1 970 275	R8 209	7.75%	20 years	R1 970 275
Illustration: paying an extra R1 000 every month
Property Price	Loan Amount + interest	Monthly Instalment	Interest Rate	Loan Term	Total Paid to Loan
R1 000 000	R1 728 458	R9 209 (extra R1000)	7.75%	15.67 years	R1 728 458

 

Total loan amount reduced by	R241 817
Savings on 52 months of bond service fee (assumed R69 p.m.)	R3 588

First-time buyers

While this is also an opportune time for first-time buyers to consider entering the property market, it’s important to do some homework and fully understand all the costs associated with buying a home such as attorney fees, bond registration fees and ongoing costs such as rates, water, electricity and insurance.

“Remember to consider not only if you can afford the monthly instalments but also if you can afford the ongoing costs associated with owning a home,” says Manyike. “Also, do not forget that interest rates can go up as well as down, so consider various future scenarios and incorporate a buffer in your calculations before you make any decisions.

“It’s always a good idea to speak to a financial advisor to help you formulate a financial plan. Given the uncertainty of the current economic climate, their advice and insights could be very valuable to you,” says Manyike.

Fixed versus variable interest rates

Homeowners and new home buyers also need to explore the pros and cons of opting for a fixed interest rate versus a variable interest rate. A fixed-rate remains unchanged even if interest rates change, while a variable rate follows the adjustments of the rates made by your bank following Reserve Bank announcements.

The disadvantage of a fixed rate is that you may miss out on savings when rates are cut.  On the other hand, a variable rate may be costly if the Reserve Bank maintains high-interest rates over a prolonged period.

Bring down your debts

“The key is not to automatically see a low-interest rate environment as an opportunity to buy more. It can also be used to help ease your debt load. Apart from paying extra on your home loan, you can consider using it to increase your credit card and personal loan repayments,” says Manyike.