What if we told you that you could save over R480,000 in interest repayments to the bank on a R1.4 million house or apartment if you paid just R1,000 more than your required instalment over 20 year repayment plan.
Of course, despite the 25 basis points interest rate cut, many South Africans - including high income earners - are currently cash-strapped and in debt, but an additional R1,000 and consistent payment could go a long way to saving you hundreds of thousands of rands. It would also reduce the loan term by about four years.
On Thursday, the South African Reserve Bank (SARB) decided to cut the interest rate for a second time this year. The repo rate was cut by 25 basis points and fell from 8% to 7.75%. This means the prime lending rate will also drop from 11.5% to 11.25%.
The September and November interest rates cuts, represent a 50 basis points cuts in the rates this year after a sustained period of interest rate hikes since November 2021.
Paying an additional R1,000 will not be easy, but it can benefit homeowners in the long run as they will save massively on interest in your home loan repayment.
Salem Nyati, the head of consumer financial education at Momentum, said that South Africans need to play it smart and encouraged them to pay more towards their debt even with the lowered interest rate.
“While the relief in instalment drop may be welcomed, using those savings to pay extra on your debt will see a decrease in the interest you pay and ultimately a decrease in your debt term,” she explained.
How can you do this?
Most South Africans spend the largest proportion of their income on their bond or home loan.
Lightstone data shows that the average cost of a property in SA is around R1.4 million. This is why we are using a R1.4 million home loan for illustrative purposes.
Here’s how you could save almost R500,000 using an R1.4 million property as an example over a 20-year period if you just add R1,000 to your current home loan payment, without paying a deposit. Of course an additional deposit would accrue even more savings.
Using home loan originator BetterBond’s home loan repayment calculator, now that the prime lending rate has dropped to 11.25% your monthly repayment is expected to be R14,690.
If you paid an additional R1,000 to this, it would bring your new monthly repayments to R15,690, resulting in interest rates savings of R 480,162 over the duration of the loan period.
Your total loan amount will be R 3,045, 338 and your total interest will be R 1,645,338.
Without the additional R1,000, and assuming the interest rates remained at 11.25% for the duration of your loan term (of course this is unlikely), your repayment to the bank would be R3.52 million.
According to the calculator, your new loan duration period would be 195 months (16 years and three months) instead of the full 20-year period, resulting in 45 fewer payments to the bank.
Do not use the new interest rate to get more debt
Nyati has cautioned South Africans to not use the interest rate relief to get more or new debt.
“Don’t use the relief provided by an interest rate cut to enter into new debt. This can actually lead to financial quicksand, especially in the cases of consumers who may not previously have qualified for credit but who can now access it,” she advised.
“The danger emerges when the interest rates once again rise and subsequently the consumers’ instalments, and they do not have any financial buffer in place to cover them.”
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