As interest rates continue to rise, homeowners with mortgage bonds may find themselves facing increased financial pressure. The recent increase this week by another 0,5% takes the prime lending rate generally charged to bondholders to 11,75%. The rate was at an all-time low of 7% in September 2021and now your bond costs you 40% more.
Putting into perspective, a bond of R1 000 000 in 2021 cost R7 753. Now the same loan costs R10 837 (R3 084 more). The reality is that bonds are paid with after-tax income. So if you are working on extra income like a side hustle to keep up with your new repayments you will need to earn up to 40% more to cover the tax.
As these high rates are likely to be around for the foreseeable future whilst inflation (CPI 6,8%) is still way out of the band of 3% to 6% we should look at ways to mitigate the high cost of this debt.
Work with your access bond
If your bond and your current account are linked to your internet banking you have a super effective tool to tackle the debt in the long run. Your current account earns no interest and your home loan is charging you say 11,75%. At the end of each month, the bank calculates the average balance in your bond and takes the applicable interest from your monthly instalment first and then the very little left over is paid towards the loan. So during the month, you should keep as much as possible in your bond and as little as possible in the current account. The higher average monthly balance means that from your next instalment, you will pay less interest and more off on your loan. Over time this will build up extra funds which you can access at any time. If you leave this alone you could find yourself saving fortunes by shaving off years on your bond.
This plan doesn’t cost you anything. You simply are warehousing as much as you can in the bond through the month and trickle-feeding the minimum into your current account for day-to-day living as and when you need to.
Example:
A bond of R1 000 000 @ 11,75% over 20 years has a monthly repayment of R10 837.
If you improve your monthly balance in the bond by only R1 000 you pay up your bond 5 years earlier saving you R468 171 in future repayments.
A measure of last resort
If you cannot keep up with the repayments having cut back as much as possible on your expenses then sooner than later you should have a meeting with the bank to negotiate and explore ways to reduce the monthly repayments.
The options to consider:
- A relief period where you pay the interest only for a period
- Increasing the term of the bond.
- Negotiate a lower interest rate.
Be aware that any of these options will help in the short term but will effectively cost you more in the long run. Once you get back on your feet you should pick up the access bond strategy to recover and avoid these extra costs.
We are in a tough economic period and it is far better to make a plan now around your home loan whilst you can. The consequences of doing nothing will be harsh as creditors narrow down on you to attach your property.