Homeowners invest in less debt

21 January 2009

Thousands of South African homeowners are opting to overpay on their home loans, and many more are expected to keep their monthly repayments steady even though amounts payable have started to decline with lower interest rates.

In a statement issued this week, ooba property financing manager Kay Geldenhuys explained that clearing home loan debt was currently a popular strategy among homeowners.

“Lots of South African homeowners are worried about [the] uncertain economic backdrop, nervous about the stock market, and just having too much debt, so they are dumping excess cash into their bonds,” she said. “We’ve also seen that many homeowners have asked their banks to keep their monthly repayments at levels they were before the rate cut, to pay off their home loans quicker.”

Huge savings on interest

According to ooba, formerly known as Mortgage SA, the savings from keeping monthly repayments the same are dramatic. For example, the monthly repayment on a 20-year, 1% below prime, R1-million home loan was R12 800 per month, with the interest rate at 14.5%. After the rate cut of half a percent in December last year, the monthly repayment will be R12 440, a drop of R360.

“You can ask your bank to keep your repayments at the old level, which means you’ll be overpaying by R360 per month [but] saving over R300 000 in interest over the life of the loan,” Geldenhuys said, adding that the repayment period would also reduced by over two-and-a-half years.

If interest rates drop by a further 2% over the course of this year, monthly repayments would be R11 010 a month, a drop of R1 790. If a homeowner keeps his repayment at the original R12 800, savings on interest would reach a massive R687 696, with the term of the home loan being reduced by over seven years.

Better return on investment

Geldenhuys explained that as interest rates dropped over the course of the year, the benefits of sitting on cash would diminish, as the interest being earned would decline. “Overseas it has become on of the most popular investment strategies right now, as money in bank accounts is earning almost no interest.”

“While we don’t expect rates to fall as dramatically as they have, in say, the UK or the US, we still see them falling,” she said. “This will further underpin the case for investing in your bond, as returns on cash deposits fall.”

In addition, Geldenhuys pointed out that with the stock markets the world over under pressure, investors were looking for certainty. “If your home loan rate is at 14%, putting money into the home loan means you are getting a certain return of 14%,” she said.

“And that’s a really good return in any economic climate.”

SAinfo reporter

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