Buying a home is a major financial commitment. While the rate of interest on a home loan is lower than for other forms of credit, the length of time it takes to pay off the loan means you end up paying a hefty interest bill.
By reducing your interest rate, you can save a significant amount of money.
A deposit reduces the principal debt and could get you a lower interest rate
By putting down a 10% deposit you immediately reduce the amount you borrow and therefore the total interest you will pay.
For example, a R100 000 deposit on a R1 million property will reduce the monthly installments by R800 and save you R86 000 in interest.
When calculating your interest rate, a bank will assess how much they would lose if the property were foreclosed. Therefore, paying a higher deposit reduces the loan-to-value ratio (LTV), which could result in the bank offering you a more favourable interest rate, as their risk exposure is reduced.
A good credit record gets you a lower interest rate
By managing your financial affairs and paying creditors on time, you will get a better credit score and therefore you could qualify for a lower mortgage interest rate.
By building up a deposit and living within your means, you will show the bank that you can manage your finances and are less likely to default
The longer the term of the loan, the more interest you pay
It may be tempting to structure your home loan over 30 years in order to lower your monthly repayment, but that will cost you significantly more in interest.
With a 30-year home loan you could pay 64% more in interest compared to a 20-year term.
If you have taken out a 30-year mortgage, aim to increase those repayments once you can afford to.
It is worth noting that you can take out a mortgage for whatever time period you can afford – even as little as five years.
The best way to save interest is to pay in more than the minimum required
Paying a bit extra on your home loan every month will help you reduce the principal debt that the interest is calculated on. This will allow you to save on interest payable and reduce the term of your loan considerably.
For example, paying R1 000 extra every month on a R1 million home loan over 20 years at an interest rate of 7% could save you R208 000 in interest payments, and reduce your repayment term to less than 16 years.
When you apply for a home loan, don’t stretch yourself to the maximum
Ideally, you want to purchase a home where you can afford to pay an extra 10% into your mortgage each month.
Apart from paying off your home sooner, you also give yourself a buffer if interest rates rise or if you fall into financial difficulty.