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Johannesburg - Home-owners will shave years off their home loan repayment terms if they ignore interest rate cuts.
Since December, interest rates have been lowered by five percentage points. On a home loan of R1m over 20 years, that means a reduction of R3 555 in monthly bond repayments.
But if home-owners did not accept the lowered rates and kept repayments at pre-rate cut levels, they would typically shorten a 20-year bond by 4.3 years, said Lindy Zokufa of FNB Home Loans.
"You get a greater saving if you do not accept the prime rate change," Zokufa said.
Craig Kiggen, executive director at Consolidated Financial Planning, said it is advisable to keep monthly repayments as high as possible because "every R100 extra paid into a R1m bond over 20 years financed at prime will save you roughly R54 000 in interest over the full term of the bond".
However, lower instalments are a "welcome relief for those who have been struggling to maintain their lifestyles", and also give leeway to pay off other debts such as credit cards and store accounts.
Kiggen said whether one decides to accept prime rate reductions and invest the saving elsewhere "is fairly contentious because of the trade-off between potential equity returns and the guaranteed return of a bond instalment".
While equity returns are not definite, he said the interest rate you pay is guaranteed and only fluctuates when the Reserve Bank changes the repo rate.
Although equity managers prefer consumers to take advantage of the value in the market as the equity market will outperform any asset class in the long run, "we have seen in the recent past that equity returns can be catastrophic", said Kiggen.
"When you account for the individual's tax rate, an after-tax return of prime is not bad," he said.
To keep your bond payments steady, you can contact your bank telephonically or send a written request.
Kiggen's view is that you should aim to get yourself out of debt as quickly as possible. "Once you are debt-free, your ability to save is inordinately more flexible," he said.
- Fin24.com