How the interest rate affects your home
loan
Many homeowners are feeling the pinch these days because
the South African Reserve Bank took rates of interest from
an easy 700 points down to a tight 1100 points. Of course
the reason for this was economically driven and a repeat of
the 1998 drop in interest rates is not likely to happen any
time soon.
There are a few things a homeowner should do to determine
how the interest rates will affect them over the next few
years.
First, familiarize yourself with a mortgage rate calculator.
There are several good ones on the Internet that will help
a homeowner figure out the impact on their home loan should
the Monetary Policy Committee (MPC) determine that a repo
rate increase would be best for all (these mortgage calculators
are typically free to use). These online mortgage calculators
are simple to operate, you fill in the current amount of your
mortgage and the calculator pretty much does the rest; you
simply click the button a few times.
Many financial analyses suggest a ‘realistic’
household budget in order for people to find out what their
home loan repayment resilience level would be. What these
analysis’s want people to realize is there are two types
of spending – optional expenses and essentials expenses.
Once this is figured out, a homeowner will be able to tell
what the extra amount they would be able to afford on their
home loan.
Go back to the mortgage rate calculator, it will show a homeowner
the effects of an interest rate increase on the home loan.
Start escalating the variable home loan rates by small amounts
of between 0.20 to 0.30 percent and make a notation in a notebook
about where the highest interest rate you would be comfortable
with (you could pay).
A bank will only lend up to 30 percent of the homeowners
salary and this is what they will consider when someone is
seeking a loan. This is one of the major factors in why it
is very important to layout a budget and make sure you and
your family can live with that amount going to the bank each
month.
A homeowner must be proactive when addressing the rate increases.
Before considering fixing a house repayment rate of interest,
consider some alternatives. Try talking to the loan originator
to lock in a better rate of interest or shop around for a
better rate. If you find a better interest rate and the amount
to switch to the other lending institution is reasonable,
then do it.
A homeowner could lengthen the time of the home loan. If
a rate compromise is not enough to alleviate the repayment
risks, and then find quotes for a 30 or 40 year loan, increasing
the loan by 10 or 20 years.
Remember, for every 0.5 percent of rate concessions, you
will increase your resilience level by the same amount.
When the interest rate tide turns, you will be paying more
if you fix your interest rate now, although, paying a somewhat
increase amount at that time is preferable to forfeiting the
family home today.
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