Financing your home

In a volatile interest-rate environment, it’s important to keep your mortgage repayments stable. Episode 7 of our Change in your Pocket series looks at the financing of your home.

– Video supplied by BrightRock

Welcome to The Change Exchange where we are discussing the ins, outs, trials and tribulations of owning your own home.

With interest rates more likely to go up than down, a rate hike may leave you financially squeezed, so a good financial strategy is to find a way to keep your mortgage repayments stable.

While opting for a fixed mortgage rate can really help a new homeowner who would struggle to adjust to unexpected increases in interest rates, you do pay a premium for a fixed mortgage.

Another strategy is to create your own, less expensive, financial buffer by paying in an additional 10% on your monthly repayments. If interest rates don’t rise, then you’re paying off your home over a shorter period and saving on interest. If they do rise, then you are able to absorb them as part of your repayment. Interest rates could rise by about 1.5 percentage points before you would be affected. The more you are able to pay each month, the greater the financial buffer you create.

If you pay an additional 10% on your monthly mortgage repayment, you will pay your home off in less than 16 years. On a R1 million mortgage, that’s a saving of R250 000.

You can also protect yourself by putting down a larger deposit. Not only would a deposit reduce your monthly repayments, but it could also reduce your interest rate, as a deposit lowers your risk profile.

The following is based on an R1 million property. With a good credit record and a deposit of R100 000, you should qualify for an interest rate at least 50 basis points below prime. With an interest rate of 8.75%, you would pay R8 000 per month. Over the 20 years you would pay R1 920 000.

If you did not put down a deposit and had a weak credit record, you’d be lucky to get a rate of 100 basis points above prime. At an interest rate of 10.25% your monthly repayment would jump to R9 800 per month. Over 20 years, you would pay R2 352 000 in total.

By putting down a deposit and having a good credit record, you could save around R432 000. You could save up the R100 000 deposit within a year if you just saved your future mortgage payments.

The shorter the period of the loan, and the lower the interest rate, the less you pay for life cover on the loan. BrightRock allows clients to set their cover to take into account the interest rate on their loan as well as the term of the debt. This helps with the relevance and efficiency of cover and premiums.

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