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The stubborn home loan debt

by | May 15, 2019

The stubborn home loan debtThe first few years of paying off your home loan can be a very disheartening experience. Despite paying in thousands, if not tens of thousands of rands each month, the amount you still owe hardly budges.

In the first few years interest makes up a very large part of the repayment. This is because of how amortisation works. Amortisation is the process of spreading the loan repayments into a series of fixed payments so that the loan is completely paid off by a specific date.

“As each monthly payment is made, part of the payment is applied as interest on the loan and the remainder of the payment is applied towards reducing the principal,” explains Ewald Kellerman, chief risk officer at Absa Home Loans. The amount allocated between interest and principal debt (capital) varies each month.

Listen to Maya and Mapalo Makhu discussing this and other topics in the My Money, My Lifestyle podcast.

At the beginning of the loan, interest costs are at their highest. For home loans, where you are paying off the debt over 240 months, initially the majority of the payment is towards interest and you only pay off a small amount towards the principal debt. As time goes on, more of your payment goes towards the debt and you start to pay less interest.

In the example provided by Absa home loans, on a R500 000 mortgage, by the end of the first year you would have made a total repayment of R59 903 (R4 991.90 per month).

However, of this amount, R51 609 went to interest and only R8 294 to capital. So, by the end of year one, your outstanding debt has only reduced to R491 706.

In the fifth year, only R12 328 goes to capital. By now you have paid nearly R300 000 into your mortgage, but the balance has only reduced to R451 593.

It is only after 13 years (by month 160) that the amount that is allocated to the capital equals the amount paid to interest. By this point the outstanding mortgage would be around R280 000. From here on, however, the outstanding mortgage reduces significantly each month as an increasing amount of your repayment goes to the principal debt. In your final year, nearly all your installment goes to the principle debt with only R2 748 paid in interest.

How to reduce the debt sooner

If you want to reduce your outstanding mortgage sooner, then you need to pay in more each month. Every single extra rand you pay goes directly to paying off the principal debt, as the interest is already deducted from your agreed monthly installment.

As you only pay interest on the outstanding debt, by reducing that debt with extra payments, you drive down your interest costs. This means a higher percentage of your agreed monthly installment starts to go to capital repayment. This creates an acceleration effect which is why even a small amount like R500 a month can help you pay off your home loan several years earlier.

Using the same example, if you paid the extra R500 per month, by the end of year one your capital would have reduced to R484 693.

This means your outstanding balance has been reduced by R7 013 more than if you had made no additional payment. Although you had made only R6 000 in additional payments, the extra R1 013 reduction is due to less interest as the balance has reduced. This means that a higher percentage of your normal monthly installment has gone to principal debt.

By year five, your balance would have reduced to R412 358 – that means you owe R39 235 less than if no additional payment was made. In this case your additional payments over the last 60 months only came to R30 000. So, you have already saved R9 235 in interest.

Home loan debt repayments table

By paying in the extra R500 per month, by year 16 you would have paid off your mortgage – in comparison if you made no additional payments you would still have an outstanding balance of over R220 000.

The rule with any debt is that the more money you pay, the less interest you owe. The longer you take to pay off a loan, the more you will spend on interest.

Credit line

The other benefit of paying extra into your home loan is that it can act as a credit line at a later stage. Most credit facilities on home loans reduce in line with your agreed repayment schedule, but if you pay in extra you are able to access those “pre-paid” funds at a later stage.

Speak to your bank

If you are paying in extra to your mortgage, it is worth informing your bank. While the extra funds will be allocated to the principle debt, depending on your home loan agreement, the bank may reduce your monthly installment so that you are still paying off the loan over the agreed 240 months. Ask the bank to keep the installment the same so that you can accelerate your debt reduction.

This article first appeared in City Press.

75 Comments

  1. Can I negotiate a better rate with my bank ?

    Reply
    • Yes you can but each bank has its own rules. Some are more likely to review than others .

      Reply
  2. Hi Maya, we are currently under debt review and would like to pay 90% of what is outstanding on our home loan account. (Debt Counsellor no longer practicing, so no assistance there) As we have a court order in place our monthly installment is stipulated as well as a time period. Can the bank decline my request, and would the funds be allocated to the principal debt? (I’ve tried contacting the bank concerned, to no avail) I don’t want to sit with legalities and would still remain under debt review until the home loan is settled.

    Reply
    • There is no reason why you cannot settle sooner. It is also worth noting that if your mortgage is the only outstanding debt you can exit debt review as long as you can meet the mortgage payments. This article may be useful as it shows what to do when you no longer have a debt counsellor https://mayaonmoney.co.za/2019/10/when-can-you-exit-debt-review/. Which bank are you with?

      Reply
      • Thank you for your response. We’re with ABSA. They are insisting we get a new DC. (Unnecessary cost) NCR – not at all helpful as they are basically insisting on the same. No other outstanding debt. We have paid a huge amount to ABSA and requested it gets allocated to the principal debt) I received automated response (I want a paper trail, so not keen on phone calls) I shall wait for an updated statement, and hopefully, they’ll answer questions posed to them re the outstanding balance to be reworked even though a court order is in place for monthly payment.

        Reply
        • The requirement for a DC is very frustrating but they do require one to exit debt counselling. Alternatively you can try the National Consumer Tribunal

          Reply
  3. Hi

    I’m curious about how the fixed interest work seeing that interest went down this year. Is it advisable to fix it and also will there be amount added because of fixing the interest.

    Reply
  4. HI Maya,

    My Std Bank bond is 12 years old and is currently under debt review, my repayment is R11834 my balance is R440000, if this continues it should be paid off in the next 4 years.

    If, I voluntary withdraw from debt review, how does the bank calculate the monthly repayment on the balance of 440k if the remainder of loan term is 8 years.

    Would the repayment stay the same or would it be reduced in line with the amount of months left on the 20 year agreement.

    I find that the debt review payment is becoming too much for me to manage each month so having a lower monthly repayment will allow me to put extra into the bond when I am able to afford the extra.

    Hoping you can assist with info on this.

    Reply
    • Keep in mind that you can only withdraw from debt review when all debts are paid off except for the mortgage. Banks have different ways of dealing with debt review, I have had conflicting information on this. Best to ask Standard Bank – personally it would make sense if they recalculated on the remaining eight years. But this could be a function of which home loan you have with them. See this article https://mayaonmoney.co.za/2018/07/what-kind-of-access-bond-do-you-have/

      Reply
  5. Hi Maya,

    thank you, great advice as always.
    We have a flexi bond account, meaning the installment changes as interest rates changes. what i find confusing is that everytime we put in extra into the bond then the following month our bond installment is also reduced , why do the bank do that ? how can i get them to fix my installment to the linked interest rate and not change everytime we put in extra in the bond because i feel like they are countering our efforts to reduce the debt and pay it off earlier..
    Thank you

    Reply
      • Hi Maya,

        Thank you for the feedback, it is with FNB, i will send them a request to fix my installment.
        what will happen though as right now it has decreased substantially due to the lower interest rates although i manually make payment of the difference into the bond.
        To what amount will they fix it to? or must i tell them how much i want to pay per month? maybe fix it to what it was before covid?

        Reply
  6. Hi,

    I have been paying extra into my bond and it just reduces the outstanding balance. Is there any benefit to having the extra funds that have been paid in capitalized? I thought that by capitalising this money i could ask for it to be allocated directly to reduce the prinicipal amount but the bank says this is not possible as it will only reduce the outstanding balance

    Reply
    • Not sure what you mean by principle amount, but when you pay extra into your bond it reduces your outstanding balance (the capital amount you owe) which means that the amount of interest you pay reduces. It will be difficult to see the impact at the moment as interest rates have been decreasing, but if you compare your interest charge on your statement you will see that the interest charged has been decreasing as you add in extra funds. This means more of your installment goes to reducing the outstanding loan and so your repayment period reduces. Just make sure your minimum monthly installment is not reduced by the bank as your outstanding balance is reduced.

      Reply
      • I just would like to understand what the effect of the bank reducing my minimum monthly installment makes on the bond if I still religiously continue paying the same amount I’ve been paying since the bond started and also putting in additional amounts on top.
        This is the case as well when interest rates reduce, I still pay the same amount despite the bank altering my instalment amout to reflect what it is with the reduced interest rate. Kindly explain why I must ask the bank not to adjust my minimum monthly installment. Thank you

        Reply
        • In that case you do not need to. Some banks automatically adjust the payments when rates decrease – which is why I mention it in the article. I had to instruct my bank to keep my installment debit order the same

          Reply
  7. Thank you Maya! Its amazing how little advice our banks “lend” when we borrow such substantial sums. Your R500 extra grid is on point and ppl must have it debited automatically from day one – you don’t miss that R500 bucks anyway!
    Heres my story, I have R20K left to pay but I want to keep my bond account open indefinitely. I want to borrow money at MY BOND RATE for future needs; paying my son’s monthly university fees etc. Is this a good strategy or must I make arrangements to collect my title deeds?
    Thank you!
    Ronny

    Reply
    • Your home loan is a great, low cost credit facility. Just keep in mind it costs around R60 a month to keep the facility open, but worth having the access. Just make sure you maintain discipline and that you enter retirement with no mortgage debt

      Reply
  8. What does uncapitalised interest on home loan mean?

    Reply
    • This is the amount of interest you will still pay over the period of the home loan. You will not necessarily pay that interest if for example the interest rate changes or you pay off the home loan sooner. They can only capitalise interest for the current period.

      “Uncapitalized interest would be the future interest to be earned by the lender on a loan. Given that interest is the lender’s compensation for lending the loan, the lender can only capitalize the interest to the outstanding balance relating to the period of the loan that has elapsed”.

      Reply
  9. When the recent rate change occurred the system automatically recalculated the required instalment due based on outstanding balance + available prepaid funds over the remining loan term to ensure the bond amortizes correctly over remaining loan term…….This is the answer I got from the bank when I needed to know why my current monthly payment on the outstanding balance of R500287 is still same as the initial amount of R573000.( having +- 71000 in prepaid funds)

    I might not know much on amortisation, Maya can you please explain it in a laymen’s language?

    Reply
    • I would need to speak to the bank to get a better understanding but what may have happened is that when you put in the prepaid funds, the installment reduced. Over time that results in effectively “eating” into the pre-paid funds. Have you noticed prior to the interest rate cuts that your installments decreased when you add in extra funds?

      Reply
    • Hi Maya. I have a question my mom has a bond with ABSA from 2000, in 2006 she borrowed on the bond. But the problem the outstanding balance closes higher end of financial year than it opened on. There nearly R400, 000 in Capitalized Interest, the credits is R570, 000, there is a R50, 000 difference in the Outstanding balance after paying for 17 years never mind what was payed before the loan in 2006.

      Reply
      • please send me an email with the information and your mom’s account/ID number and I will ask Absa to investigate

        Reply
  10. HI,

    I have signed up for a 1 million rand bond for the next 20 years. I do have a lump sum of cash I would like to pay in.

    How do I pay in this money? Do I just ask the bank to allocate the money to the principal debt? I also want to monthly instalment to be re- adjusted and will continue to pay in extra each month, is this something I need to ask them to do or will it re-adjust automatically?

    Thanks

    Reply
    • You can just add the money into the bond account, but you must inform them NOT to decrease the bond installment as a result – otherwise you lose the benefit of paying in that lump sum. You can ask the bank to deduct a set installment each month which is higher than your bond repayment

      Reply
  11. HI Maya. I have recently taken a hoam loan of R900000 for a 25 year term. I started saving an extra R2000 in my bank account every month to oay towards the loan. However, i haven’t sent these extra payments to the bank because I am not sure how best to reduce my capital? Like should it be through lunp sums? Or is there a particular time in the month where the monthly additional payment will have the most impact?

    Reply
    • Interest is calculated daily on a home loan – that means the sooner you add the money the better!

      Reply
  12. Hi Maya

    Great article. I have one question. I took out a home loan in 2014 for 790000 payment of 8500 at 10.5% interest rate, now in 2020 the interest rate has dropped to 7.25%? and I still own 688000. Is it better to put in additional monthly payments when the interest rate is high or low? I understand I will reduce the term of the loan and payments but do I save more when the rate is lower or higher if I had to make additional payments per month?

    Regards
    David

    Reply
    • When interest rates are lower your debt is costing you less money, but it also gives you the perfect opportunity to pay off your property sooner. Money that was going to interest can now be allocated to capital. By continuing to pay R8500 a month, even though your monthly installment has dropped, you effectively pay in extra to your capital each month. Also keep in mind that these low rates are expected to be short-lived. Once the economy recovers and inflation returns, rates are likely to rise. So by keeping your installments at the original level, you know you can absorb additional rate hikes in the future without affecting your budget.

      Reply
  13. Hi Maya, I hope this finds you well. I do not know much about home loans and their repayments, including interest. What I’ve seen so far when looking at listings and loan repayments is that one ends up paying almost if not double the value of the house at the end of the mortgage, which means the interest is just about the same amount as the purchase price of the house. My question is, is it in any way possible that one can secure a personal loan of the price of a house and pay back that loan, or would the repayments of the personal loan be the same as those of a home loan (i.e the final amount paid back on the loan)??

    For example, if I get a home loan for R600K and end up paying back R1.3m after 20 years. Would I end up paying around the same R1.3m for a personal loan of the same amount??

    I’m only 25 and still in school by the way, but this home loans and total amount in repayment… especially the interest kind of worries me a bit.

    Thank you. ?

    Reply
    • I am glad you asked the question because it is something a lot of people do not realize and a topic I covered in a podcast https://mayaonmoney.co.za/2019/09/listen-the-20-year-home-loan-fallacy/
      The reason the total interest is so high is because of the TERM of the loan being 20 years. A personal loan may be only five or ten years. However, you can take out a home loan of only five years and save a huge amount on interest. Home loan interest rates are lower than personal loans so it makes sense to rather take the home loan and pay if off over a shorter period.

      Reply
  14. Hi Thanks for the article. I have a question, if for example, you take a home loan for 30 years of R1m. And after paying for a few months, you sell the property for R1.2m. If i pay this R1.2m to the bank, will I be relieved of the debt or will I still need to pay the interest for the 30 years? How does this work and with the interest when you pay off your property before the repayment term ends?

    Reply
    • You will never pay for interest you have not incurred. The bank simply gives you the quote on the interest so you understand the full implications. If you have met your repayments each month there should not be any outstanding interest. Keep in mind you must give your bank 3 months notice that you are closing the bond otherwise they will charge you a penalty of three months interest.

      Reply
  15. Hi Maya
    I have a property since 2007 and will now enter year 13. Currently this property is on my and my ex wife’s names. I have to transfer the property to my name and if I understand correctly I have to basically apply for a new bond. I will not get the same interest rates I got 12 years ago. What are my options to transfer the property and to keep the cost as low as possible?
    Thank you

    Reply
    • You are correct – it is a new bond application. Ask the bank if they could waive or reduce the bond registration costs considering you already paid them for the first bond application

      Reply
  16. Hi
    I and my wife have applied for a home loan and got 80% with APPROVAL IN PRINCIPLE over 20 years. I would like to convince the bank to give us 100% over 30years rather. Is that possible?

    Reply
    • I highly doubt it. Rather save a deposit – it will save you a lot of money

      Reply
  17. When I took a bond 2013 the bond was R555000 but 6 years later balance is 590000,how possible this is?I need help

    Reply
    • Ask your bank for an amortization statement that shows all the interest charged and your payments. If you missed payments that would have a significant impact on the interest charged

      Reply
  18. I need to take out a home loan on unbonded property together with my sister and my spouse. The property is in my sisters name, is it possible?

    Reply
    • I have asked the bank for comment on this – a lot of considerations…

      Reply
    • FNB Spokesperson: Buyisile Maseko, Growth Head, FNB Gold Segment

      “I need to take out a home loan on unbonded property together with my sister and my spouse. The property is in my sisters name, is it possible?”

      As the owner (sister) previously cancelled the bond registered over the property and wishes to take another home loan (in the name of 3 parties), a new mortgage bond will have to be registered which would have costs associated.

      The couple wishing to purchase a portion of the property would need to purchase a share in the property, which has transfer duty costs associated. Once the parties have agreed on this purchase, the Title Deed can be endorsed in the Deeds Office to reflect the new names, and home loan finance can be obtained from the Bank for the loan required, provided that all parties qualify.

      Reply
  19. Hi Maya, have another property that I get rental income from and have the means to pay off the outstanding amount for the bond but I’m weary on going that route, especially regarding the tax implication I would not be able to claim back the interest payment on the bond. Have also been paying extra but had not informed the bank to allocate to the principal debt. To pay off the full loan and get an increased tax bill on rental or to allocate the extra payment over the years and ask the bank to reduce the monthly instalment?

    Reply
    • You need to do the calculations to see what the impact of the two scenarios are. Generally speaking tax should not be a primary motive

      Reply
  20. Hi Maya I see that you say depending on your home loan agreement the bank would allocate the extra money to the priciple debt, under which circumstances or type of loan agreement would this not be the case.?

    Reply
    • What I find is that each bank has a different mechanism depending on the type of mortgage so the best is to tell your bank to allocate it to the principle debt to make sure it is allocated

      Reply
  21. Good day, thank you very much for such stress saving input. I truly appreciate this. My question is i just realised my monthly installments increasing instead annually. what is the reason for this? as a would want a stanble monthly payment. secondly will paying that extra a month help to ensure i get fixed monthly installment? I am truly grateful for this advise

    Reply
    • I’m not sure I understand. are you saying your monthly mortgage repayment is increasing?

      Reply
  22. Ma’am

    I save to the tune of 30k a yr and I want to put this down on my bond every yr, does this means I will finish my bond earlier than the initial 20yrs?

    Lastly I’m contemplating of taking a lone and pay off my bond and pay the loan over a period of 5yrs which is quiet cheaper is that possible?

    Thanx

    Reply
    • Any money you put into your bond will reduce the repayment period. It would make no sense to take out a loan to settle your mortgage as your mortgage would be at a much lower interest rate than the loan. Rather just pay extra into your mortgage

      Reply
  23. Does this work for vehicle finance loans as well?

    Reply
    • Yes, but if you have a balloon/residual payment ask the bank to allocate any extra payments towards that first

      Reply
  24. Let’s say you get paid on the 20th of every month but you put extra amount on the 1st of every month, would it also count or u have to put in extra amount on the same date the debit order goes through??

    Reply
    • You can put in extra anytime – even when you get a bonus. That is where my extra money goes 🙂

      Reply
  25. Do we need to go into the bank and arrange with them or does the bank automatically picks up the extra payment each month and directs it to the principal amount of debt cause I have been paying between a 500.00 to a 1000.00 extra each month and haven’t seen any adjustments to my statement or is it still early bound period now is about 8 years running

    Reply
    • It should automatically go to the principle debt, but what I found with my bank was that as I paid in extra, they lowered the installment amount so it would still be paid off over the full period. I had to ask them to retain the original installment amount. I would suggest you ask the bank for the amortization statement – that will give you a better idea of the impact of those extra payments

      Reply
  26. According to me Home loans are a way to entrap people into unending debt. Don’t get a home loan unless you can pay 50% of the bond in cash. The best thing is to rent, but unfortunately there is a perception that renting a property is bad. People need to wisen up!

    Reply
    • Based on calculations I have done, it takes about seven years for rent to catch up with the bond repayment. so if you are not planning on living there for more than at least five years, rental may be a better option

      Reply
  27. Hi Maya, if you pay in a lump sum like R200000 towards your home loan, will that reduce my interest on my home loan? How can I ensure that overall, I pay off my home loan quicker n with less interest?

    Reply
    • That will go straight to the principle debt and reduce the rand value of your interest payment. You can ask the bank for an amortization statement to see the impact

      Reply
    • I am tempted to cancel my investment portfolio (unit trust) and divert that monthly premium to the bond insted. The portfolio has been active for 5 years (investment term 15 years) and has literally been no positive gain since inception. It is frustrating to be charged all this monthly fees but 0 perfomance . I’m already paying R 2200 extra payment on R 6000 installment p/m bond at 10.75 % interest rate and the R 1100 monthly from the investment can make a massive impact in reducing loan term. Is it a wise decision to cancel investment? (Investment was just to save money)

      Reply
      • You have been through one of the worst bear markets we have seen in a long time. But that is usually the time NOT to cash in. The markets have started to recover. I would suggest you also look at your investments to ensure you have a well-diversified portfolio

        Reply
  28. Very informative just got approved for a home loan on higher interest but due to my credit profile so they say. I appreciate the advice.

    Can I move my bond to other bank or negotiate lesser rate at the later stage?

    Reply
    • If your credit score improves, then it would be worth approaching the bank again. But they do say they only review after two years

      Reply
  29. I’ve been paying more on my loan for the longest time, yes first few years I’ve been difference, but later it was changing, not moving or even going up. I visited my bank several times and I was told is because of the insurance (25year money back guarantee) that I have signed, they can’t help me

    Reply
    • That sounds like a weird bank product, never heard of that…can’t comment. Which bank is it?

      Reply
  30. I have a bond over 360 months if l ask the bank to capitalize my bond will my interest rate be reduce or my repayment period

    Reply
    • Not sure what you mean by recapitalise. But I can say that over 360 months you will pay a massive amount of interest. So any chance to pay it off before then would save you money

      Reply
    • The bank will immediately allocate that to the capital balance, so it reduces your outstanding amount. The only thing to check is whether they then reduce your monthly installment (as you have a lower balance). You want them to keep the normal installment so that you can pay off sooner

      Reply
      • Hi Maya
        I have been paying my home lone account from 2003 .More than 7 years now I have been paying R2000 + extra as a fixed monthly repayment without in failure. Am I eligible to request for my remaining balance interest reduction review?

        Reply

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Maya Fisher-French author of Money Questions Answered

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