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Save a fortune by maintaining your original bond payment

17 February 2009 FNB

First National Bank (FNB) Home Loans this week advised bond holders to act sensibly and put back the latest interest rate cut savings by the SA Reserve Bank on their bonds, as this could help them reduce the home-loan term a lot quicker and make whooping savings on interest.

The SA Reserve Bank Monetary Policy Committee (MPC) took the decision to reduce the repo rate by 100 basis points a week ago. The bank has now cut the repo rate by 150 basis points, when we also take the December 50 basis points cut. Both moves have pushed prime from 15.5% to 14%.

The cumulative savings following the 150 basis points imply a decline in prime rate instalment repayment (monthly compounded) of R552 per month (from R6 769.40 to R6 217.60) on a R500, 000 20 year bond. A R1 million bond now attracts an instalment of R12 435 from R13 539, a savings of R1, 103 a month.

Dawid Spangenberg, FNB Homeloans Head of Strategic Credit urged households to plough the extra money on their home loan.

“We are living in tough times, and it is clear that many households are taking a lot of financial strain. But, we would appeal to bond holders to put back the savings from interest rate reductions on their bond accounts, this way they can reduce the outstanding balance a lot quicker, and save a lot on interest.

Lets take Mrs. N A Mapetla, she is paying off a R500 000 bond over 20 years, with interest charged at a prime rate, with a monthly installment of R6 217.60.

If Mrs. Mapetla decides to maintain the original installment of R6 769 (before the 150 basis points), she’ll reduce her loan term by five years and nine months (69 months) and save R469 992 on interest.

But if she decided to pay the lower installment of R6 217.60 due to the lower interest rate, her loan will still be paid off over the same term but the amount of interest saved will be lower, R134 432.

We could also take the example of Mr. MJ Van Rooyen. He owns a R1 million house, with 20 years maturity and interest charged at prime rate.

If Mr. Van Rooyen decided to maintain the original installment of R13 539, as opposed to the latest reduced installment of R12 435, he could reduce his loan term by five years and nine months (69 months) and save up to R939 984 on interest.

But, if Mr Van Rooyen chooses to pay the lower installment of R12 435 and use the R1 104 savings on something else, his loan will still be paid off over the same term, but the interest savings will be lower, R264 864.

Loan Balance

R 500,000

R 1,000,000

Option Used

Option A

Option B

Option A

Option B

Reduction In Installment

R 552

R 0

R 1,104

R 0

Reduction In Term (Months)

-

69

-

69

Interest Saving

R 132,432

R 469,992

R 264,864

R 939,984

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