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By unknown | Apr 08, 2008 | COMMENTS [ 0 ]

Isaac Moledi

Isaac Moledi

Are you one of the countless South Africans who are tempted to skip a bond repayment because of spiraling inflation and the current economic squeeze?

Do you feel your disposable income is diminishing and you are battling to service your credit obligations?

Experts say that skipping a bond repayment could cost consumers fortunes, a loss that will take a very long time to recover from.

John McGinn from Nedbank's home loans division says defaulting is not prudent, given the implications a repayment default has on the terms of repayment and the amount of interest charged afterwards.

McGinn says: "Missing a repayment on a home loan might seem innocuous but the consequences can be costly in the long term."

He illustrates his point by giving an example of a person who takes a R615000 bond at the current interest rate of 14,5percent and a repayment period of 20 years. The expected monthly instalment would be R7871,99.

He says the starting balance after the first year's interest will be R622 871 and the total repayment over 20 years is expected to be R1889 277,60.

Suppose you skip just one payment and do not make arrangements with the bank to pay it off, McGinn says, and the repayment period balloons from 240 months to 261 months - an extra 21 months.

Instead of paying the original R1889277,60, McGinn says, you will be saddled with R2054589,39 - an additional R165311,79.

Paying a fortune because of falling behind with repayments differs from depositing an extra lump sum into a bond account, says Nedbank experts.

Kenneth Chitando, head of banking services at Nedbank home loans, says depositing an extra R50000 into a home loan account with a life span of 20 years, for instance, can save a consumer more than R250000 in interest.

He says: "In fact, any additional sum paid into a loan can dramatically reduce the amount of interest you pay over the term of the loan."

Chitando illustrates his point by giving an example of a person who borrows R615000 from a bank at 14,5 percent interest over 240 months, with a monthly repayment fee of R7871,99.

Say 56 months later the consumer has R20000 extra and decides to put it into his home loan account, Chitando says.

"At this point the consumer has already paid off R440831,44 and still has R550 008,09 to repay.

He says putting in the R20000 will reduce the repayment period to 164 months.

In the end, Chitando says, the consumer would have repaid a total of R1751837, 80 - a saving of R137439,80.

Chitando says: "You could say that over 20 years R20000 has given the consumer the same power as R137 439,80."

He says no matter how big or small a home loan is, the principle remains the same. The way interest works over the long term magnifies the effect of what you do now.

McGinn says consumers who find themselves under pressure and cannot fulfil their obligation to pay their home loan instalment in a particular month should come to an arrangement with their financial institutions as soon as possible.


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