Very shortly homeowners with mortgage bonds will be receiving letters telling them that as a result of last week's one percent hike by Reserve Bank Governor Chris Stals in the bank discount rate of interest, the interest rates they are paying will be going up to between 19 and 20 percent a year.
But, did you know that you are actually paying more than your bank says you are paying, in percentage terms?
Chris Bvsenberg, of Sanlam, says if you are told you are paying 19 percent a year, you are actually paying 20,75 percent a year.
Likewise, if you are told you have an interest rate of 20 percent, you are actually paying 21,94 percent a year.
The reason is that the banks charge what is called a convertible monthly rate. They do this by dividing the annual rate you are quoted by 12 (months) and charge that rate monthly on your outstanding debt.
This creates a quirk. By dividing the quoted interest rate by 12 and charging that percentage every month, the effect, Bvsenberg says, is that you pay a higher annual interest rate.
The monthly rate at a quoted 20 percent is 1,66 percent and at 19 percent it is 1,583 percent.