Working out the interest on my home loan

In South Africa, interest rates can fluctuate from time to time. It is important to know what this means for your monthly expenses, especially for the big-ticket items like home loans, vehicle finance agreements and credit cards.

What is interest?

Before we look at how to calculate the interest you pay on a loan, let’s understand what “interest” means.

In general terms, interest is the fee that a lender charges for lending money to a borrower. In South Africa, the Reserve Bank (SARB) sets the repurchase (repo) rate for money that it lends to the country’s banks. This percentage forms the baseline for the interest rates that lenders charge their borrowers. The default interest rate that banks charge is known as the prime interest rate and is always higher than the repo rate. This interest income is how banks cover their costs and make money.

When the repo rate changes – up or down – so does the prime rate: by the same percentage. This, in turn, affects all your monthly repayments.

Interest is always expressed (a.k.a spoken about) as a percentage. The amount of interest you pay is then calculated using that percentage based on the total amount of money that you borrow.

How do I calculate how much interest I will pay on a home loan?

The interest payable on your loan will be included in your monthly repayment amount, so you don’t have to do the calculation yourself. However, if you are interested to find out how much interest you will pay over the span of your loan term, this can become slightly tricky to calculate because it is based on both:

the outstanding balance of your loan, and over the period or term (5, 10, 15, 20 years) of your loan.

This is also known as compound interest and means that the amount you owe the bank also increases every day. Thankfully, you don’t have to calculate this on your own. There are a number of online calculators that can help. For example, BetterBond has an amortisation or repayment calculator that shows how repayments are structured in relation to the capital and interest amounts that you will ultimately pay.

Will I ever pay off my home loan?

After realising that the amount you owe the bank increases every day, paying off your home might seem impossible. However, there are two things to bear in mind:

When the bank structures your repayments, they do it so that over the first few years, most of the monthly repayment goes towards paying off the total interest and a fraction is allocated to the capital amount (the actual price you paid for the property). Effectively, you pay the interest off before you pay off the capital. If, when you start paying your loan, you pay more than the minimum amount, this will reduce the amount of interest you pay over the years. This also reduces the length of time (or term) over which you will pay and, best of all, saves you money in the long run. For example, if you have a bond for R1 million at an interest rate of 10%, and you pay an extra R250 every month, you will reduce the total repayment time by one and a half years.

How do I get a lower interest rate on my home loan?

We have already mentioned that the banks’ prime interest rate is their default lending rate. Based on the client’s credit score, banks will approve loans at either prime plus a percentage or prime minus a percentage. Obviously, prime, minus a percentage is the first prize. Here are some pointers for either paying less interest and/or getting a better (lower) interest rate for your home loan:

Save and put down a substantial deposit on the property so that your total loan amount is smaller which means that banks will also look more positively at your application. Budget – and stick to your budget. This means understanding your monthly expenses, knowing what you have left after you’ve paid the bills and putting money aside for a rainy day. Banks ask for your budget when you apply for a home loan. If it shows both what you save, and your disposable income – how much you have at the end of the month – this has an impact on how they respond to your application. Maintain a good credit score by consistently paying your accounts, home loan and things like your cell phone contract, both on time and with the correct amount (or more) every month. Shop around. Even though we think that our regular bank will either approve our home loan application or offer us the best deal, this may not be the case. It pays to compare. This is not as difficult to do as you might think because you can use a bond originator – like BetterBond. This means submitting all your information and documents just once. Then they do the rest for you so that you get the best deal (interest rate) possible.

Have more unanswered questions? Here are some related questions – and answers – that might help…

Which bank has the lowest interest rate on home loans in South Africa?

All banks set their base or prime lending rate based on the repo rate which is set by the South African Reserve Bank. It is difficult to say which bank offers the lowest rate because they deal with each home loan application individually. The interest rate that you pay on your bond may be different from somebody else’s, even if you are with the same bank.

What is the current interest rate for home loans in South Africa?

In May 2023, the prime interest rate is 11.25%. This is the default or base rate for all home loans. However, the interest rate that the bank will charge on your bond will depend on a number of factors including whether you have put down a deposit on the property, your disposable income and, of course, your credit score.

What formulas do I use to calculate the total interest amount?

If you don’t want to use an online calculator, here are the formulas that can help you do rough calculations to get an idea of what you’ll end up paying in interest:

To work out the monthly interest on an amortised loan (i.e. a loan you must pay back over time):

• Interest rate ÷ the number of payments for the year = the interest for that year
• The interest for that year x amount outstanding on your loan = interest for that month
• Instalment amount – interest = how much you will be paying off the capital

Repeat these three steps for as many months as the term of your loan, and add up the answer to 2, to find out the total interest you’ll pay.

Daily interest: (Balance outstanding x interest rate) ÷ 365 (number of days in the year)

Monthly interest: Daily interest x 30 (number of days in the month)

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