Find the best home loan deal

2012-09-29 11:48

Letters from our readers this month highlight the need to

understand the interest rate on your loan.

Make sure you always understand

exactly how much your debt is costing you, not only your monthly repayments but

how much you will pay over the whole period of the loan.

It is also

important to make informed decisions about whether or not to fix your

interest rate

Humphrey writes:
My five-year Step-Up loan from FNB has come to an end and I need to sign on to a new home loan agreement.

I can afford to repay R2?200 a month and top up once a year with R10?000 from my 13th cheque.

Should I select the Step-Up loan again, a fixed rate or a variable interest rate?

Maya replies:

FNB Step-Up allows qualifying customers to pay lower initial bond instalments which then increase yearly at a rate of approximately 2.5%.

It does this in order to allow for the settlement of the original debt within the original loan term of 20 years.

The interest rate offered is a compulsory five-year fixed rate and on expiry of the fixed-rate contract, the customer has an option to re-apply for another five-year fixed rate to continue with this facility or convert the mortgage loan to a variable interest-rate product.

A Step-Up loan is really only if you cannot afford to meet the monthly repayments on a normal home loan but hope that as your salary increases over time, you will be able to meet the increasing instalments on the loan.

The Step-Up loan does cost you more over time as you are initially paying less into your mortgage than required and therefore paying interest for longer.

In your case, Humphrey, and based on the information provided, you can well afford to meet the monthly repayments on a normal home loan so you no longer need the Step-Up loan.

Interest, repayment and total cost:
When deciding on the best home-loan structure for your needs, there are three important figures to look at: your interest rate, the monthly repayment to ensure you can afford it and what the loan will cost you over the full period.

Be careful of just selecting the lowest monthly repayment as this is usually due to the loan being structured over a longer period of time, so you need to consider the full cost of the loan. The more you pay each month the quicker you pay off the loan and the less you spend on interest.

Fixed rate:
A fixed rate is set for a period of time and gives you peace of mind.

You know exactly what your mortgage repayments would be each month for the next five years.

Variable rate:
This rate moves with the prime interest rate, so you may benefit if there is another interest-rate cut and your mortgage repayments fall.

However, if interest rates start to rise, it will make your mortgage repayments higher.

We are currently at the lowest interest rates in 30 years so it is unlikely there will be significant interest-rate cuts at this stage.

Normally a fixed rate is at a slightly higher initial interest rate than a variable rate, yet I see from your information that FNB is actually offering you a slightly lower interest rate to fix than the variable rate.

They are probably taking a potential interest rate cut into account.

If interest rates remain the same, you will pay less for your fixed rate.

This shows the importance of understanding your interest rate.

Balancing debt and savings:

If you select either option, your required monthly repayment will be less than R1?800, so by repaying R2?200 a month you will reduce the amount of time it takes to pay off your house and save on interest.

It is important, however, that you also consider putting money into an investment for your later years.

Remember that you can’t eat your house.

Perhaps consider paying half the extra money into the mortgage and the other half into an investment or at
the very least investing your yearly R10?000.

First and foremost, look at the interest rate, the affordability of monthly repayments and what the loan will cost over the full period

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