Buy your own home

BUYING your own home is one of the soundest financial decisions you can make.

Once you have decided which house to make your home, it is time to apply for a home loan at a bank.

There are various offers and products on the market, and it might be difficult to decide which product would be the best for you.

One of the guidelines you should use when deciding who will finance your bond is the interest rate you are offered. Interest is the cost you pay back to the bank for borrowing money and forms part of your monthly bond instalment.

Marius Marais, CEO of FNB Housing Finance explains how interest rates affect your home loan repayments:

Banks typically offer an interest rate that is based on a published rate, also known as the prime lending rate.

Generally there are two types of interest rate options that a customer can choose from for paying back their home loan - variable and fixed rate.

Variable Rate

A variable interest rate changes with the prime lending rate.

For example, let's say the current prime rate is 9,5percent. For a R300000 loan at 9,5percent the monthly bond instalment would be R2797 over a 20-year period.

If the prime rate was to go up to 15percent, your bond instalment would escalate to R3951 - resulting in an additional amount of R1154 a month. This could have a major impact on your budget.

Fixed Rate

A fixed rate is usually offered at a slightly higher interest rate than the variable rate but it isn't subject to the changes in the prime rate.

Over the longer term it creates a more stable budget and allows for annual salary increases to cover increases in other expenses, such as transport and electricity.

At the moment the five-year fixed interest rate you will pay is about 1.5 percent higher than the variable interest rate.

A R300000 loan at a fixed interest rate of 11percent over five years would mean a monthly bond instalment of R3097 spread over the 60-month period.

Once the fixed term expires, you can again choose to pay a variable interest rate or to fix your interest rate for another five-year term. The interest rate will be fixed for the next period at the then prevailing fixed interest rate.

While the variable rate option may look more attractive initially (R2797 versus R3097 on a fixed rate) the fixed rate may be a worthwhile option to consider when rates are expected to move up as is currently the case in our example.

After prime moved up by 1,5percent, you would actually save money with the fixed rate option.

General Tips:

• Consider paying an extra amount on your bond instalment if you can afford it. For example, an additional R50 a month makes a huge difference.
• Any extra money you pay reduces your outstanding balance. You will save on interest as interest is calculated on your daily outstanding balance.

You will also repay your bond quicker and thus shorten your repayment term.

• You can use these extra payments to create a savings pocket if you need to pay a large unexpected (or expected) amount.

Your bank will have certain conditions that you need to look at in order to access this money, and it is best to discuss these when you take out your home loan.

There are many easy ways to make your interest rate work for you.

• For more information contact FNB Housing Finance on 0860-644-644