Interest Rates & Your Bond Repayment

Christopher Mills
February 6, 2023

A topic I've heard a lot of people talking about recently is how their bond repayments have gone up and they're starting to feel the pinch but they don't quite understand what's going on. So, today I want to talk through that a bit, share my knowledge, and hopefully a few things that will give you a clearer idea of what's going on and how this is affecting you.

To kick things off, I'd like to share a table that I feel is really important. This table shows us what your bond repayment would have been back in September 2021 and what it is now based on how much your bond is:

It's pretty obvious when you compare how much you were paying in September and how much you're paying now. Look at the column on the far right, that's how much more you're paying each month when that mortgage repayment comes off your bank account. If you have a R1,500,000 house, the amount it has gone up is equivalent to the monthly school fees of a good school - how's that for perspective?

Add to this the inflationary increases in everything else, including food, and you can quickly see why you're running out of disposable income or are struggling with your monthly payments. When you add everything up, it's no laughing matter at all and you need to be aware of this and you should be tracking all of this.

How does this work?

In its simplest form, when you buy a house and get a bond from the bank (99% of people), this bond is essentially a loan as you probably know. You're due to repay that loan but you're also due to repay the interest that grows on the loan. The interest is how the bank makes money by lending you the money. Now, that interest amount that you pay gets larger as the interest rate increases. In other words, the interest you pay is an amount calculated by the amount you loan for the period the loan is set for, and that amount increases should the interest rate increase. The higher the interest rate goes, the more that interest amount is and therefore the more you have to pay each month to keep up with that and honor the duration of the loan repayment was agreed upon.

I appreciate that this can be confusing and it's half the reason I believe people get caught up. When you take a loan to purchase a house, you look at the interest rate that the bank offers but you don't necessarily think about what the interest rate could go to and because of that, you get a surprise when interest goes up and so do your repayments.

More Graphs & Numbers

Although the graph below is in dollars, the purpose is to show you just how much the repayments increase as the interest rates go up. You can see that a couple of percentage points at any point along the journey has a really big effect on how much you'll be paying back each month.

I shared a table at the top with how much repayments have gone up and BetterBond has created a more involved table that shares some interesting insights into this with more detail:

The moral of the story is to look at situations like this when you're wanting to get a bond. Don't only look at the current interest rate, look at what happens as it goes up. In our context in South Africa, it's gone up from 7% to 10.75% in just over a year. For all of those people who ran out during Covid to buy houses because of great interest rates, they're going to be feeling the pinch right now! Lenders do a great job of shouting about amazing interest rates, don't get caught out, please.

What To Do?

At this point, I guess the next thing is to look at what you should do. My immediate recommendation would be to look at your household expenses, create a budget and get really good at being careful with your money. That sounds easy but it's hard to face the numbers and commit. I've built an expense tracker, which you're welcome to make use of for this. I cannot stress how much of a difference this will make in your life. Discoverying unnecessary expenses is often the difference between making a payment or missing a payment.

Now, this one's obviously not for everybody but something I've always recommended is that people should do their best to pay their loan off a little bit faster than required. Even a couple hundred Rand a month extra in payments makes a big difference. Paying down a loan amount combats the pain from interest rate increases but you need to be wise about this and only spend if you're able to.

Let's say you've got R2,500,000 mortgage left and you've been paying it off for 5 years and therefore have 15 years (180 months) left. At an interest rate of 10.75%, if you pay an additional R200 per month, you'll save yourself R52,006 in the long run! Imagine you contribute R500 extra, you'll save yourself R125,655! Take a look at this calculation for a good example:

If you'd like to work this out for yourself, SA Home Loans have a free calculator that you can use here.

The point here is that if you pay down the loan quicker, when interest rates rise, you won't get hit as hard as the interest amount to be paid will be less due to the capital amount of the loan being less. One caveat, though, if you have other loan accounts for food, clothing, and vehicles, make sure to pay down the one with the highest interest rate first!

What are YOU doing to get through this?

Christopher Mills

I run a successful agency, my other passion is personal finance.

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