One of the most common myths when it comes to taking out a home loan is that you must apply for a 20-year mortgage. While the most common home loan period is 20 years, a bank can offer a mortgage for as short a period as five years all the way up to 30 years.
The period of the mortgage is determined by your affordability. The longer the period, the lower the monthly installments, however, over time you pay more interest. Ideally you want to have as short a period as you can afford.
Bontle opted for a 30-year mortgage, this allowed her some breathing space while she adjusted to her new homeowner budget and increased living expenses. This does not mean, however, that she can only pay the home off over 30 years. Once Bontle is more financially secure, she can increase her monthly payments to pay the property off sooner. For example, to settle the mortgage over 20 years instead, Bontle would need to increase her current R10 337 repayments by R1522 a month to R11 859. Not only will she pay the home loan off sooner, but she would save a massive R875 000 in interest.
When you pay in extra to your mortgage, every extra rand you pay in goes straight to the capital, immediately reducing the amount of interest you pay each month. For example, on a 20-year mortgage, by paying an extra 10% on your mortgage repayment means you would have your home paid off in just over 15 years. If you are paying in extra to your mortgage, tell your bank so it does not reduce the minimum installment to keep the loan at the original 240 months.
The added advantage of paying in extra to your home loan is that you create a buffer if interest rates increase. If you are already paying extra into your mortgage, then you would be able to absorb any increases in interest rates in the future without affecting your affordability. You also create a financial buffer if you run into financial difficulty. Any pre-paid funds (amounts you have paid over and above the minimum required) can be used to meet mortgage payments.
When things go wrong
Even if we have made all the right decisions and planned for home ownership, things can still go wrong as we have learnt only too well during the pandemic. If you find you are struggling to meet your mortgage repayment, the sooner you speak to the bank the better. The last thing a bank wants is to repossess your house, they would rather find a solution.
Retrenchment cover: If you have been retrenched you may be able to claim on any credit insurance. This insurance is usually only automatically included when the property is of a lower value or for lower income earners. However, it is an additional extra that a homeowner can apply for.
Draw down on pre-paid funds: You can withdraw any amount that you have pre-paid and use that to meet your monthly installment. However, you cannot simply ask the bank to take the mortgage installment from the pre-paid funds, you would have to physically withdraw it and then make the payment.
Take a payment holiday: If your financial distress is expected to be short-lived, for less than six months, the bank may allow a payment holiday or a reduction in the monthly repayment. Keep in mind that the interest is capitalised (added to the capital) so the net effect is to extend your repayment period, and this could be significant. For example, a three-month payment break could add 12 months to your repayment period. Therefore, still try to pay a portion of your installment to cover the interest.
Impact of repayment period
By Maya Fisher-French
*This is part 6 of a 6-part series in partnership with City Press, which takes a first-time home buyer through the process from beginning to end.
