South Africa may finally be exiting its extended rate hiking cycle. Homeowners breathed a sigh of relief as the Monetary Policy Committee announced that it would keep the repo rate pinned at 8.25% and therefore the prime interest rate at 11.75% for the time being.
Now that we are in sight of a downward trend in the interest rate cycle, Alan Rubin, ooba Home Loans’ Chief Operating Officer believes that the coming period of interest relief should be used wisely, suggesting that homeowners use this as an opportunity to pay down their home loan. “If you can afford your monthly bond instalment at the peak of the rate hike cycle, i.e., what you are paying now, then I would advise that you keep your monthly repayment the same after any rate cuts.”
Rubin shares that homeowners taking this approach can achieve significant long-term interest savings as well as a reduction of their home loan repayment period term. “By applying this strategy, you can in fact cut your home loan repayment period by years, in some cases.”
The pay-off for paying more than the minimum
According to the Q2 ’23 oobarometer, the average purchase price of a home in South Africa sits at R1,426,656. At the current interest rate of 11.75%, the minimum monthly repayment of a property of this price on a 20-year bond would be R15,461.
“In the present high-interest environment, envisioning an interest rate of 10% may sound like wishful thinking, but it's worth noting that we were at 9.75% in August 2022, suggesting that a rate drop to 10% is not beyond the future realms of possibility,” says Rubin.
“If prime returns to 10% and if you were to keep your monthly instalment at R15,461 – thereby overpaying the minimum repayment by R1 693 – you would be able to reduce your loan term to 14.71 years; effectively paying off a 20-year bond more than five years earlier,” he adds.
“You would also reduce your total loan repayment amount by a whopping R981,015 - almost a million rand in savings.”
The investment benefit of this approach becomes more apparent when applying the same approach to a 30-year loan term. Keeping the higher monthly instalment on your 30-year bond (R14,401 in this instance at prime over 30 years), at the lower 10% interest rate would deliver an even more impressive result. “The loan term is reduced to 17.53 years, meaning that it can be paid off in almost half the expected time. Here, the total loan amount repaid is reduced by over R2 million (R 2,154,257 to be exact).”
Adding to this, Rubin comments that ooba Home Loans customers are usually able to achieve a rate below prime which acts as an additional advantage. “As it stands, the average concession currently achieved by ooba Home Loans for its customers is prime minus 0.41%. So if you were to make a monthly repayment of R15,461 on a 20-year bond at a rate of 11.34%, you would repay almost two years quicker and reduce your total loan repayment amount by R331,499 - a significant saving.”
Don’t discount once-off overpayments
Home buyers who are unable to pay more than the minimum repayment amount every month can still reduce their total loan amount and pay it off faster by making once-off or occasional overpayments. “These are a great investment in the same way as having a deposit for your home purchase is. An overpayment is an extra lump-sum repayment on your bond over and above your required minimum monthly instalment,” Rubin explains.
“It is hugely advantageous to put any unexpected financial windfall – for example, end-of-year bonus, a tax rebate or an inheritance - towards your bond. A R10 000 once-off overpayment on a 20-year bond of R1,426,656 at the current prime rate of 11.75%, will reduce your total loan amount by R91,081. On a 30-year term, the benefit of that R10,000 overpayment would equate to R292,795 in savings.”
While the numbers speak for themselves, the additional benefits of paying higher monthly instalments and/or once-off overpayments are as follows:
Reduce interest payments. By making additional payments, you can effectively reduce the outstanding balance on which interest is charged. “You then have the power of compound interest working for you.”
Build equity faster. Paying off your bond earlier allows you to build equity in your home at a quicker pace. Building equity can provide financial security and open up opportunities for future investments, including financing a rent to buy property.
Potential to refinance. If you've reduced your loan balance, you may become eligible for better refinancing options at lower interest rates, further saving you money. You may also have the opportunity to consolidate other debt under your more favourable home loan rate.
“Ultimately, paying your bond off sooner lowers your financial stress and increases your financial freedom. Once the outstanding balance of your bond and associated interest is reduced, you'll have the option to redirect funds towards other investments, retirement savings, or even a home upgrade,” Rubin concludes.
