Skipping a bond repayment can cost you more than you think, warns expert

Are you one of countless South Africans reeling from spiraling inflation and the current economic squeeze? Do you feel like your disposable income is diminishing and you are battling to service your credit obligations?

Homeowners have not been spared either, with financial institutions reporting an increase in foreclosures. Generally more and more consumers are finding it difficult to service their debt. This has cast a pall on the general economic outlook.

John McGinn, from Nedbank Home Loans Division says that at times like these, homeowners might be tempted to default on their bonds. This he adds is not prudent given the implications that a bond repayment default has on the terms of repayment and the amount of interest charged thereafter.

“Missing a repayment on your home loan might seem innocuous but the consequences can be costly in the long term.”

McGinn says missing one repayment on your home loan can be better understood when one looks at the amount of extra money that a homeowner has to pay as a result.

McGinn illustrates his point by way of example:

For instance, if you have a bond of R615 000 at the current interest rate of 14.5% and a repayment period of 240 months (20 years), you are expected to pay a monthly installment of R7 871.99. Your starting balance after the first year’s interest will be R622 871 and your total repayment over 240 months is expected to be R1 889 277.60.

If a homeowner skips just one payment and does not make arrangements to pay it off, the repayment period balloons from 240 months to 261 months. This adds an extra 21 months to your repayment period.

Instead of paying the original R1 889 277.60, you will now be saddled with an amount of R2 054 589.39, with an additional interest of R165 311.79. So clearly, McGinn advises, missing your repayment no matter what the circumstances becomes costly in the long term.

McGinn says consumers who find themselves under pressure and cannot fulfill their obligation to pay their home loan installment in a particular month, should make an arrangement with their financial institution and make a plan to pay off the installment as quickly as possible.

Missing an installment is not advisable and it should be done in the most extreme of cases, says McGinn. As the example shows, it is a decision that should not be taken lightly.

Below is a tabular illustration of the effect of missing one bond repayment has on a consumers bond repayment.

Example

Costs associated with skipping an installment