Calculating the interest on your home loan

With all the current interest rate news, many South Africans might have had a crash course on 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 a lender charges to lend money to a borrower. “It is important to know that interest is purely an expense. When purchasing something on credit, the corresponding interest charges mean 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 debt repayments have become more expensive over the last year or so, consumers should know 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 the loan will be included in the 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 in finding 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 and the remaining period of the loan term. This is also known as compound interest, and it means that the amount you owe the bank also increases every day.

“There are several online calculators that can help consumers calculate the interest on their home loan. For example, BetterBond has an amortisation or repayment calculator that shows how repayments are structured in relation to the capital and interest amounts that you will ultimately pay. This can be a beneficial tool to help homeowners visualise how much they could save by paying a little extra into the home loan each month,” says Goslett.

He adds that if you start paying your loan, you pay more than the minimum amount, and this will reduce the amount of interest you pay over the years. This also reduces the 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 still unsure how interest rates work are encouraged to speak to a financial advisor for further insights. “You do not want to get into a situation where you do not fully understand the implications of taking on credit. While taking on a certain level of debt to build future wealth might be necessary, 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.

Writer: Kayla Ferguson