Is paying extra into your home loan worth it?

Navigating the complexities of a home loan is essential for effective financial management. Interest rates and additional payments significantly influence the total cost and duration of your mortgage. This article provides a clear overview of how these factors affect your loan and offers practical strategies to manage your repayments effectively.

The Effect of Interest Rate Changes on Your Home Loan

Interest rates determine the cost of borrowing money from a lender. Even minor fluctuations can have a substantial impact on your monthly repayments and the total amount paid over the life of the loan.

Example:

Consider a home loan of R1,500,000 with a term of 30 years.

• At an interest rate of 7%:

  • Monthly repayment: Approximately R9,979.

  • Total repayment over 30 years: Approximately R3,592,634.

  • Total interest paid: Approximately R2,092,634.

• At an interest rate of 9.75%:

  • Monthly repayment: Approximately R12,887.

  • Total repayment over 30 years: Approximately R4,639,434.

  • Total interest paid: Approximately R3,139,434.

An increase of 2.75% in the interest rate results in an additional R2,908 in monthly repayments and over R1 million more in total interest paid over the loan term.

The Impact of Extra Payments on Your Home Loan

Making additional payments towards your home loan can reduce both the loan term and the total interest paid. Even modest extra payments can yield significant savings.

Example:

Using the previous scenario with a 9.75% interest rate:

• Adding R100 extra per month:

  • New monthly repayment: R12,987.

  • Loan term reduced by: Approximately 15 months.

  • Total interest saved: Approximately R165,942.

• Adding R500 extra per month:

  • New monthly repayment: R13,387.

  • Loan term reduced by: Approximately 61 months (over 5 years).

  • Total interest saved: Approximately R648,897.

• Adding R1,000 extra per month:

  • New monthly repayment: R13,887.

  • Loan term reduced by: Approximately 100 months (over 8 years).

  • Total interest saved: Approximately R1,024,345.

These examples demonstrate that even small additional payments can lead to substantial savings and a shorter loan duration.

Strategies to Manage Your Home Loan Effectively

1. Review Your Interest Rate:

Regularly assess your mortgage interest rate. If you find that your rate is higher than current market rates, consider negotiating with your lender for a better rate or refinancing your loan.

2. Make Extra Payments When Possible:

Allocate any surplus funds, such as bonuses or tax refunds, towards your home loan. Even small, consistent additional payments can significantly reduce your loan term and total interest paid.

3. Utilise Lump-Sum Payments:

If your financial situation allows, consider making lump-sum payments to decrease your principal balance, which will reduce the amount of interest accrued over time.

4. Maintain Open Communication with Your Lender:

If you’re facing financial difficulties, proactively communicate with your lender. They may offer solutions such as restructuring your loan to make repayments more manageable.

In Conclusion

Understanding how interest rates and extra payments affect your home loan is crucial for effective financial planning. By actively managing your mortgage through strategies like negotiating better rates and making additional payments, you can reduce the overall cost and duration of your loan.

Disclaimer: This article is for informational purposes only and should not be considered financial advice. For personalised advice tailored to your specific financial situation, please contact us or one of our qualified financial advisers at Corona Financial Services.