Home Loan Series Vol 2

We continue to use our example from volume 1:

Capital debt (i.e. balance owing):
R500 000
Interest rate:
Prime (15% at time of writing).
Remaining period of loan:
20 years
Minimum Monthly Instalment (approx):
R6 584

In the first year your payments will total R79 000, however your capital reduction on your bond (ie the amount you paid off on your bond) will only be R4 295. The rest (R74 713) goes towards interest (and bank profits!). At the end of 20 years, you will have paid about R1.6 million for the loan of R500 000. The interest you paid to the bank is a whopping R1.1 million.

Scary, isn’t it? The problem, as discussed in the previous article, is the capitalisation of interest, over and over again EVERY MONTH FOR 20 YEARS!

So what do we do about it? Well, the fact that interest is calculated daily can be used to our advantage. For example, a debt of R500 000 attracts interest of R205.48 every day. A deposit into the account of, say, R1 000, reduces this daily interest bill to R205.07. Doesn’t look like much of a saving. However, this 41 cent saving is earned each and every day that the extra R1 000 remains in the bond. So, if the R1 000 is left there for a month (31 days), the interest saving is R12.74. This small interest saving means that next month, there is R12.74 less owing to the bank to calculate interest on, and to capitalise over and over again each month for 20 years. Using our example, an additional deposit of R1 000, made in month 1 of a 20 year bond, will knock 4 months from the term of your bond.

In the article, we will give examples to illustrate how you can use this principle to save yourself thousands of Rands.