DO NOT REDUCE PAYMENTS WHEN INTEREST RATES DECREASE

In South Africa, interest rates are often subject to wide fluctuations with little warning. When rates decrease, the banks generally reduce your monthly instalment accordingly, and place the onus on you to contact them if you do not want this change to be made. It is very easy for us to fall into the trap of accepting the reduced instalment because a) we can all do with a bit extra each month, and b) who can be bothered writing to the bank anyway?

Using our example, a 1% drop in interest rates reduces the bond term by over 4 ½ years if the instalment is maintained at the original level. Even if you are already halfway through your bond term (i.e. 10 years) when the rate decreases, by maintaining your payments at the same level you will reduce your bond term by approximately 1 year.