Using reduced interest rates to slash your home loan and other big debt

John Manyike, Head of Financial Education at Old Mutual.
John Manyike, Head of Financial Education at Old Mutual.

Homeowners have received a little wiggle room with the South African Reserve Bank’s recent 50 basis point repo rate cut.

“The rate cut will leave homeowners with some surplus cash, providing some much-needed relief, given the economic constraints caused by Covid-19,” says John Manyike, Head of Financial Education at Old Mutual.

“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.”

His 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.

In the example below, he illustrates the benefits of paying extra on your home loan:

(Total loan amount reduced by R241 817.00 with savings on 52 months of the bond service fee (assumed at R69.00 per month) – R3 588.00.)

First-time buyers

While this is an opportune time for first-time buyers, it is important to do your homework and to fully understand all of the costs associated with investing in a property such as attorney fees, bond registration fees and the ongoing costs such as rates, water, electricity and insurance.

Remember to consider not only if you can afford the monthly installments 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 home buyers 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 rate adjustments by your bank following the Reserve Bank’s 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.

Reducing your debt

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,” concludes Manyike.