Over the years South Africans have always been affected by fluctuations in the interest rate, and home owners who have outstanding home loans are always affected first. Here are some tips on how to manage your home loan through rising interest rates.

Know how Interest is calculated on your home loan?

Interest on your home loan is calculated daily on the outstanding balance. If you were to deposit a lump sum of money into you bond account; it decreases your outstanding home loan amount, which in turn decreases the interest charged on your home loan. Interest to your outstanding balance is added at te end of the month, which is payable at the beginning of the next month. For example, if you depositing your bonus into your bond account on the 20th of December, you will decrease the interest amount payable as from the 20th of December.

Rising Interest rate can have a devastating impact on your cash-flow

If the Interest Rate rises as little as .5%, it increases your Interest rate, which increases your monthly home loan repayments and this could put financial pressure on you if you were to only make ends meat. When buying a property you should bare in mind the fact that the Interest Rate could rise.

What you can do if the increase in your monthly home loan installment is affecting your cash-flow?

If you have a wide range of credit products an increase in the interest rates will affect all of them, from your home loan to your car finance to your credit card, and so on. There are a couple of options that you could consider to give you a relief in your cash-flow:

Debt consolidation:

If there is enough equity in your property or the value of your property has risen and you have paid off a great amount of your bond already, you could finance your short term debt over a longer period, this allows you to consolidate your short term debt into your home loan. By doing this it will mean that your monthly commitments would be reduced.

This is due to the fact that you are paying off the short term debt over a longer period (the term of your bond repayment – usually 20 years). This method is only a short term solution and by doing this you will take longer to pay off debt. This also means that you will be paying more on interest on this short term debt in the long run. Rather pay an extra amount into your bond so you can pay of more interest sooner.

Increasing home loan Period:

You could increase the length of your home loan term, for example from 20 years to 30 years, which will reduce your monthly repayment because your debt will be stretched over an additional 10 years. Again, you must keep in mind that you would have now added another 10 years of paying interest on the loan, which means you will end up having paid more interest on the total bond in the long run.

Fixed Interest rates:

Financial institutions also offer you an opportunity to fix your interest rate for a period of time which will assist you in budgeting better by fixing your monthly repayment for a period of time. Take note that this is usually a higher interest rate that the current rate you have.

When the interest rates go down, and you keep your installment at the “higher” monthly payment (assuming that you don’t decrease your payment again, but that you are still covering the minimum installment required by the bank and more) your capital repayment will decrease and so will your interest over the 20year period. So, to keep your objective of paying off your bond faster, you need to try to increase your minimum repayment.