If you are finding it difficult to meet your monthly home loan commitments at current interest rates, you could extend the life of your mortgage loan.
However, consider all the consequences before you take this step. It can save you a bit on your monthly budget but it will cost you a whack by the time you have finally paid the money back.
According to the latest Reserve Bank quarterly report, South Africans, on average, are now paying about 12 percent of their after tax income to reduce debt this is up from slightly under nine percent two years ago. Most of this is a result of higher interest rates.
The recent reduction in interest rates on mortgage bonds has come as a welcome reprieve for many people, but many are still struggling.
Apart from higher interest rates, individuals are also being affected by other factors such as relatively lower salary increases and having to pay more income tax.
Increasingly, individuals are looking to increase the repayment period of their debt to reduce the monthly repayments, particularly on mortgage bonds, which have the lowest interest rates.
The accompanying graphic shows why you should consider the option carefully (figures supplied by Cape of Good Hope Bank).
If you had an outstanding mortgage loan of R100 000 which had 10 years to go, your monthly repayments would be R1 883,09 a month. By the end of the
10 years you would have paid the bank R225 970 (the R100 000 plus R125 970 in interest).
If you extended the life of the bond by five years to reduce your monthly repayments, you would pay R182,95 less a month but by the time you had paid off your bond you would have paid the bank an additional R80 225.
The best option, if you can afford it, remains paying your loan back earlier. If you reduced the term from 10 years to five years on the same outstanding R100 000 you would pay only R56 469 in interest over the outstanding five years.
This is R69 501 less in interest than the repayment period over 10 years and a whacking R149 736 less than if you had added an extra five years to the remaining life of the loan.