This Mortgage Tip is worth more than R100k to you

Home Loans South Africa: Tips to Save you Thousands

The most powerful force in the universe is compound interest – Albert Einstein

You’re about to learn how to reduce the interest paid on your bond and save more than R100k over the term of the loan.

Mortgage SavingJason Bagley (visit his website) asks a question which I believe could help many South African homeowners save money.

He posted a question (here), asking whether it would be better to take out a 30 year homeloan but repay the loan based on what a 20 year loan would cost. Wouldn’t you save more?

Firstly, Jason is already on the right track here. The first step to building personal wealth is to reduce your debt.

In many instances we’re more interested in securing a homeloan for our “dream home”, but we pay no mind to the terms of the mortgage. I’m referring to the interest rate offered on your new (or existing) home loan.

Your home loan is most probably your biggest financial commitment, and it’s easy to understand that on an average sized mortgage of R500 000 the interest rate plays a huge roll in determining how much you’ll actually end up paying.

**With that in mind, let’s quickly look at whether a 30 year term or a 20 year is best, and then I’ll answer the question above.

– Or Just Skip to the Conclusion now.

The interest rate you’ll be offered is based on the risk the bank is taking in granting you the mortgage.

The lower the risk (the more like you are to pay off the bond) the better your interest rate will be. And the higher the risk, the higher the rate.

If you apply for a long 30-year term you’ll more likely get a higher interest rate than if you take your bond over 20 years.

So the shorter the term – the more likely you are to get a lower rate. Remember, the term is not the only factor affecting your interest rate.

**Now lets look at how much you’ll SAVE if you apply for a 30-year term (despite the higher rate) and repay the loan based on what a 20 year loan would cost:

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