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Home Loan Instalments
Buying a new house in South Africa or just looking
for a better home loan or
mortgage rate.
How to Calculate the Monthly Instalment on a Home Loan
You have seen your dream house, be it your first little nest or you are looking to upgrade. You are no Donald Trump so you will need to take out a home loan to finance the transaction. The big question, can you afford the monthly instalments on a home loan?
How do the banks arrive at that figure they present you with when you apply? Well, you can work it out yourself. Everyone involved in the Home Loan Market, including banks, nowadays have home loan calculators on their websites for you to use. This will give you a good indication and help you decide if you can afford to buy your dream home.
There are different calculators; you can work out the total amount you will qualify for, what your repayment will be over different periods and what the savings will be if you pay more than your monthly instalment.
The Different Components of a Monthly Home Loan Instalment
1. Basic instalment which includes the capital and interest repayments
2. Monthly administration
3. Homeowner’s insurance premium
4. Life Assurance premium, if applicable
How is the Interest on a Home Loan Calculated?
Interest on a home loan is calculated on the outstanding balance of the loan on a daily basis and capitalized (added) to the outstanding capital amount monthly. The term “home loan base rate” is the basic rate paid by the average person and is linked to the prime rate.
Always try to negotiate a lower rate with the financial institution where you apply and also shop around. The bank takes into account your risk profile when quoting a rate. If you have a number of products with them, such as a current account and a credit card, you will also qualify for a reduced rate.
Over what Period is a Home Loan Repaid and what is the Impact on the Monthly Instalment?
The normal repayment period is 20 years. You can also repay the loan over 25 to 30 years. The benefit is that the monthly instalment will be less. However, the difference is not much, do some calculations on your favourite home loan calculator and see for yourself. Also, you end up paying much more over the total period, so only use this option if you have no other choice.
How much do I qualify for?
As a single person your instalment cannot exceed 25% of your gross monthly income. Joint income earners qualify for 30%. The emphasis is on affordability.
The Monthly Administration Fee
The fee differs from bank to bank. Some will charge you more if your homeowner’s insurance is with a third party insurer. (See the next section for more details.)
The monthly Homeowner’s Insurance Fee
In the past you were forced to take out homeowner’s insurance from the bank providing the finance. The National Credit Act has made it possible for the borrower to take out insurance from the insurer of their choice, but the policy must be ceded to the institution supplying the loan. As the bank has to ensure that you are sufficiently covered at all times they will charge you a higher monthly admin fee if you take out your insurance elsewhere. If you accept the bank’s insurance, the monthly premium will be added to your instalment.
Life Assurance Fee
The bank may request that you take out life cover to settle your home loan in case of your death. The premiums will be added to your instalment. Do not overlook the importance of having this cover, discuss it with your financial broker.
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