Increasing your monthly premiums can save you between R325,000 and R1.7 million on an R2 million home loan.
Most South Africans rely on a mortgage loan with monthly repayments over many years to buy a home.
The original loan amount is known as the principal, and interest is payable each month on the outstanding amount of principal.
Each monthly payment consists of a principal and an interest portion.
At the initial stage of the repayment period, most of the instalment goes to interest, as the outstanding principle on which interest accrues is substantial.
As each payment gradually eats into the principal, the interest portion gets smaller until most of each payment consists of the principal.
To illustrate this dynamic, we can look at a R2,000,000 home loan with a 20-year repayment period and a 9% interest rate compounded monthly. The monthly repayment is R 17,995.
The chart below visually represents how the payment’s weighting shifts from mostly interest to mostly principal.
It is interesting to assess the accelerated rate at which the composition changes from interest to the principal.
Paying a bit more each month lowers the interest rate expense and increases the principal payment.
In simple terms, every additional rand paid above the required monthly instalment directly pays off principal.
It then lowers the interest portion for the following month and similarly affects all future interest expenses.
The compounding effect of repeating the higher payment each month is staggering.
Using the same loan mentioned above, the total interest paid over the 20 years equals R2,318,684. It brings your total house repayment on the R2 million loan to R4,318,684.
However, increasing the monthly instalment by only 5% – which is less than R1,000 – saves you almost R325,000. The time to maturity also decreases by nearly 2.5 years.
Increasing the monthly payment by more has an even bigger effect, shown in the table below.
It illustrates that you can save over R1.7 million on a R2 million home loan if you double your monthly payment.
|Home loan repayments|
|Premium||Years to Maturity||Monthly Instalment||Total Interest expense||Interest Saved|