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Surviving the Interest Rates

With petrol becoming more expensive and food prices edging higher with each passing month, chances are slim that the inflation rate is going to ease back into its targeted range any time soon. For us, as credit consumers, it means that the end of interest rate increases is probably still not in sight.

Admittedly, whatever goes up has to come down at some point in time, interest rates included. The issue is that until this happens, we have to find the wherewithal to keep up with the down payments against our home loans and other debts. Basically there are only two ways in which to accomplish this: the one is to find more money and the other is to cut back on expenses. And, cutting back is probably the best place to start.

We look at two expense areas where you can achieve significant savings: The one is on your debts and the other – believe it or not - your electricity bill.

Reorganise Your Debts

Reorganising your debt is the first area of attack. It will require of you to re-evaluate your home loan and then to consolidate your short term, high interest bearing debts into your home loan facility.

Switch if necessary

Different banks offer different home loan products, and a mortgage originator is the best person to approach if you want to compare what you currently have with what you can possibly get. They will request quotes from all the banks and negotiate the best possible interest rates on your behalf.

You can also ask the mortgage originator to help you assess whether opting for a fixed, instead of a variable interest rate is the better option given your present circumstances.

Be sure to take a holistic view of the costs you will incur by switching. If it turns out to be worth your while, don’t hesitate: just do it.

Consolidate your debts

Because your property serves as security for your home loan, the interest rates levied on home loans are much lower than any other form of debt. For this reason, moving your credit card-, overdraft-, personal loan- and motor vehicle debts into your home loan could be a feasible option. But, and this is a big BUT, only if you are disciplined in your payment behaviour.

The worst thing you can possibly do is to repay the short term debt you consolidated into your home loan over the full term of the home loan. This will make the consolidation exercise hugely expensive.

Instead, and with due consideration to the interest rates on your home loan, calculate per consolidated debt how much you need to pay each and every month so as to finish your down payments within the original short term debt’s repayment term. The instalment will be cheaper than what you are paying right now. If you are working with a mortgage originator, they can help you with these calculations.

Although the savings potential is going to vary greatly from one person to the next, here is an example that should give you an idea of how much could be saved:

Example

You have 20 years left on your R 800,000 home loan at an interest rate of 15%, three years remaining and R 200,000 outstanding on your car at an interest rate of 17%, and miscellaneous debts of R 50,000 at an average interest rate of 21% that has to be repaid over 60 months.

Your current instalments are:

House - R 10,540
Car - R 7,130
Debts - R 1,250
Total - R 18,920

If the mortgage originator helps you to secure a 14% interest rate, and you consolidate your car and other debts into your home loan, the picture changes as follows:

House - R 9,948
Car - R 6,853
Debts - R 1,163
Total - R 17,964

The subsequent saving of R956 in instalments each and every month is not to be sneezed at.

Also of importance is that it will take at least a further 1.5% in interest rate hikes before you return to your current repayment levels of R 18,920 per month.

Slash your electricity bill

Electricity is one of those expenses where you are probably paying more than you should. Cutting down is easy to accomplish. This is how:

Become electricity savvy

1· Instead of using the remote when switching off your Hi-fi or TV, use the power button or wall switch. When on standby, these pieces of electronic equipment still use 85% of the power they would normally use while on.

2· Switch to energy saving light bulbs. 10 to 15% of your electricity bill per month is spent on lighting up your home.

3· Use a lower temperature setting for your washing machine. At least 80% of the power used by the machine is for heating the water.

4· When you can, dry your laundry by hanging it out instead of using your tumble dryer.

5· To become more electricity efficient when cooking, use the appropriately sized pot or pan and never use more water than necessary.

6· Have the thermostat on your geyser checked. Geysers account for about 30% of your electricity bill. The temperature should not be more than 50 or 60 degrees Celsius. Also consider showering instead of bathing. It will reduce the amount of power used by 40-50%. Also consider installing a timer. By changing the geyser’s on-time from 24 hours to 6 hours a day, you can potentially reduce the consumption by at least a further 40%.

The savings potential on your electricity bill could be as much as 30%: that is R 300 per R 1,000 spent every per month.

To conclude

Remember that every rand you manage to cut back on your regular expenses right now improves your ability to survive future interest rate increases. Other expense areas you may want to look at include cell phones, landlines and water consumption. When you start scratching beneath the surface you will be surprised at how easily you can whittle these down without having to resort to adopting a Spartan life style.

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