After the steady streak of interest rate hikes, many South Africans might have had a crash course on just how severely interest charges can affect their monthly budgets.
“Interest rates can fluctuate from time to time, so it is important to know what this means for your monthly expenses, especially for the big-ticket items like home loans, vehicle finance agreements, and credit cards,” says Regional Director and CEO of RE/MAX of Southern Africa, Adrian Goslett.
Consumers first need to understand that interest is the fee that a lender charges for lending money to a borrower. “It is important to know that interest is purely an expense. When choosing to purchase something on credit, the corresponding interest charges mean that you will pay double if not triple the original amount. That is why it is better to minimise your lines of credit as far as possible and only take on good debts, such as home loans, rather than bad debts like a car loan or store account,” Goslett explains.
To understand why all debt repayments have become more expensive over the last year or so, consumers should understand that the South African Reserve Bank (SARB) meets every second month to decide whether to change the country’s interest rates to combat inflation. “When the repo rate changes – up or down – so does the prime rate: by the same percentage. This, in turn, affects all your monthly repayments,” Goslett explains.
Anyone who already has a home loan will notice that the interest payable on your loan will be included in your monthly repayment amount, so you don’t have to do the calculation yourself. But, if you want to prepare yourself ahead of time, you can use an online calculator to get an indication of how much more your monthly repayment amount will be.
If you are interested to find out how much interest you will pay over the span of your loan term, this is slightly tricky to calculate because it is based on both the outstanding balance of your loan as well as the remaining period of the loan term. This is also known as compound interest and means that the amount you owe the bank also increases every day.
He adds that if, when you start paying your loan, you pay more than the minimum amount, this will reduce the amount of interest you pay over the years. This also reduces the length of time (or term) over which you will pay and, best of all, saves you money in the long run.
“When the bank structures your repayments, they do it so that over the first few years, most of the monthly repayment goes towards paying off the total interest, and a fraction is allocated to the capital amount (the actual price you paid for the property). If you focus on paying extra into your home loan in the first ten or so years of the loan term, you can maximise your savings on interest charges,” Goslett explains.
Those who are still unsure of how interest rates work are encouraged to speak to a financial advisor for further insights. “You do not want to get yourself into a situation where you do not fully understand the implications of taking on credit. While it might be necessary to take on a certain level of debt to build future wealth, this should only be done based on what you can truly afford. Once you have worked that out, speak to a local real estate professional to find out what homes are available within your price range,” Goslett concludes.
