Should I pay extra into my mortgage with these lower rates?

When interest rates are lower, your debt costs you less money, but it also provides the perfect opportunity to pay off your property sooner.
When interest rates are lower, your debt costs you less money, but it also provides the perfect opportunity to pay off your property sooner.

Personal Finance


With significant rate cuts this year, many of our readers have questions about making the most of lower interest rates

David writes:

I took out a home loan six years ago for R790 000 and payment of R8 500 at 10.5%. Now the interest rate has dropped to 7.25%. Is it better to add additional monthly payments when the interest rate is high or low? I understand I will reduce the term of the loan and total cost, but do I save more when the rate is lower or higher?

City Press replies:

When interest rates are lower, your debt costs you less money, but it also provides the perfect opportunity to pay off your property sooner. Money that was going to interest can now be allocated to capital. By continuing to pay R8 500 a month, even though your monthly instalment has dropped, you in effect pay in extra each month.

Keep in mind that these low rates are expected to be short-lived. Once the economy recovers and inflation returns, rates are likely to rise.

By keeping your instalments at the original level, you know you can absorb additional rate hikes in the future without affecting your budget.

Where the credit agreement makes provision for a fixed interest rate, the interest rates will stay the same throughout the duration of the agreement.
NCR

Marcia writes:

I have two personal loans that I took out last year with an interest rate of 27.5%. The interest rate cuts have made no difference to these loans because they are at a fixed rate. Is that correct? I was hoping that they would be reduced to the maximum rate allowed under the National Credit Act. Is it legal to still charge me a rate above the maximum?

City Press replies:

There is a maximum rate that a lender can charge under the National Credit Act. This is based on the repo rate, plus a specific percentage. In the case of a personal loan, it is repo + 21%. With the rate cuts, the repo rate has fallen to 3.75%, which means the maximum that can be charged is 24.75%.

This is what would happen with a variable or fluctuating rate linked to the repo. Unfortunately, according to the national credit regulator (NCR), the fixed-rate agreement at the time you took out the loan supersedes any changes to the repo rate.

“Where the credit agreement makes provision for a fixed interest rate, the interest rates will stay the same throughout the duration of the agreement. Even if the fixed loan rate becomes higher than the maximum allowed, it will still be lawful, as this is consistent with the fixed interest rate principle,” says the NCR.

Your only option is to consider taking out a new loan at the lower rate and settling the loan at the fixed rate immediately. Speak to the credit providers about this option. You will pay initiation fees, but this could be offset with the lower interest rate. Make sure you do your calculations first to see the net saving.

SHOULD I BUY A SECOND PROPERTY?

Themba writes:

I bought my first property 18 months ago with FNB and I would like to buy another one soon. Will the bank offer me a lower interest rate because it would be the second property, or should I apply for a reduction on the first before getting another?

City Press replies:

The rate will be determined by the interest rate now (prime is 7.25%) and your credit risk. If you have a good payment history on your first home, that could be positive. However, taking on more debt could increase your credit risk. The bank might be concerned about your ability to meet both home loan repayments.

The bank will provide you with a home loan based on your existing income – they will not factor in potential rental income. It is best to discuss this with them and get a preapproval on a home loan. Also consider that, if you are intending to rent out one property, it is better to have the most debt on that property as the interest would be tax deductible from the rental income.

Dumisani writes:

I have a paid-up house and now I need to buy other property for business purposes. I have applied for a bond against my house and it has been approved. I am just waiting for the final quotation from the bank and I will be taking a 60% bond. Am I making the right decision?

City Press replies:

It is important to consider tax implications. It is better for the business to pay the loan repayments as the interest would be tax deductible from any income generated from the business.

The bank could use your paid-off house as collateral but issue the home loan on the business property. It is important to discuss this with the bank before you move ahead.

HOW DO I USE MY SURPLUS INCOME TO SERVICE DEBT?

Joseph writes:

I have outstanding debt on a car and two home loans. I am paying additional amounts on each loan, which come to about R4 400.

Is it advisable to split the money among all three loans or to contribute all the money to one loan until it is paid up and move to the next loan? Or do I invest the surplus and pay it as a lump sum after some months.

City Press replies:

Any additional money you pay into a loan benefits you by reducing the total amount of interest that you pay. Keep in mind that with debt, interest is calculated daily, so it doesn’t make sense to invest (when interest is earned monthly) and pay a lump sum every few months. The sooner the extra payment is made, the more interest you save.

It does make sense to try to target the more expensive debt first. In this case it is possible the car finance is more expensive, so you would want to pay that off as soon as possible.

A car is a depreciating asset, so it is worth less than what you owe on it.

Given the cut in interest rates, a possible strategy could be to keep your home loan payments the same as they were before the rate cuts. This means you pay more towards the capital repayment and it protects you if rates increase again.

You then focus the additional R4 400 on paying off the car as soon as possible. Find out if there is a residual or balloon payment for which you need to make provision. Once the car is paid off, you can focus on paying off the home loans.

SHOULD I SETTLE MY CAR IN FULL?

Sethele writes:

My outstanding settlement on my car is R170 000. I have savings of this amount. Is it a good idea to pay it off now?

City Press replies:

Given the low interest rates on deposits, you are probably earning little on the R170 000 but paying at least 11% on the car finance. It could make sense to settle the car debt.

What you need to consider first is whether you have emergency savings.

If not, a good strategy could be to keep some funds for an emergency and use the rest to accelerate your loan repayment.

For example, you could keep about R40 000 in a high interest-bearing account, which would ensure that you do not have to take out more debt in the case of an emergency.

You could then use R130 000 to reduce the loan. You then have two options – either you reduce the monthly instalment and pay the car off over the same period, or you keep paying the same amount and pay the car off sooner. The latter option will save you a significant amount of interest.

If you already have emergency funds and choose to settle the car in total, make sure you use the saving you make from not having to pay the car instalment each month to start rebuilding your savings and start investing for the long term.

HOW DO I EXIT DEBT REVIEW?

Lere writes:

I’ve been on debt review since 2010. I am left with my house bond and I want to cancel. What is the procedure for cancellation?

City Press replies:

You are able to exit debt review if your only outstanding debt is a home loan. If you have been paying directly and have settled all your debts, you need to ask your creditors for a paid-up letter for each account. Your debt counsellor is responsible for issuing the clearance certificate and removing you from debt review. If your original debt counsellor is not contactable, then you can transfer to a new debt counsellor to issue the clearance certificate.

Some debt counsellors offer this clearance certificate service to non-customers, but could charge a fee of about R1 000. You could apply to the national credit regulator (NCR) to obtain a clearance certificate. This is issued to all creditors, credit bureaus and the NCR’s debt system to remove the debt review flag.

INVESTMENT CONTRIBUTIONS?

Matodzi writes:

Is it advisable to continue to pay a monthly investment policy in the time of the Covid-19 coronavirus pandemic?

City Press replies:

You are trying to limit the effect of the Covid-19 coronavirus on your finances and the best way to do that is to cut spending rather than dip into savings or to stop investing. However, if your income has reduced significantly or you have lost your job, you might have no option.

Before you stop contributions to your retirement or other contractual investments, speak to the service provider. There might be some penalties for simply stopping the debit order, but if you notify them first they could provide a premium waiver.

In terms of market returns, it makes sense to keep investing monthly as you are buying the investment at a cheaper price than in January.

This could add significantly to your returns when the markets recover.


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Maya Fisher-French 

Personal Finance Editor

+27 11 713 9001
personalfinance@citypress.co.za
www.citypress.co.za
69 Kingsway Rd, Auckland Park

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