The maths behind your mortgage


Lately, homeowners have been dreading announcements from the Reserve Bank’s Monetary Policy Committee (MPC). Inflation has been running rampant due to the war in Ukraine and what we now call – the post COVID-19 hangover. This has led to Central Banks hiking interest rates to combat the rising cost of living.

But what do all these technical terms mean for you, and how does it affect your pocket? The answer to this lies in understanding the math behind your mortgage.

The effect of an interest rate hike on your bond

The Prime interest rate is the basic rate of interest that commercial banks will charge their clients when loaning them money. In 2020, at the height of the COVID-19 pandemic, the prime interest rate was 7%. At the time of writing, the Prime Interest rate is sitting at 9.75%. 

While a difference of 2.75% might not seem like much, over time the difference is massive. As an example: Sam found her dream home, but, unfortunately, the price tag is R1 500 000. As Sam does not have R1 500 000 lying around, she contacts her bank for assistance. Because Sam is such a loyal customer and has a good credit record, her bank offers to loan her the full R1 500 000 a rate equal to Prime (7%) over a 30-year period.  The key numbers are summarised below:

Bond AmountR1 500 000,00
Interest Rate7,00%
Term360 months
Monthly RepaymentR9 979,54
Total RepaymentR3 592 634,40
Interest PaidR2 092 634,40

This means that, over the 30-year period, Sam will have paid almost R2 100 000 to her bank for loaning her the money to buy her home.  Now assume the interest rate increases to 9.75%:

Bond AmountR1 500 000,00
Interest Rate9,75%
Term360 months
Monthly RepaymentR12 887,34
Total RepaymentR4 639 433,83
Interest PaidR3 139 433,83

Not only has Sam’s monthly repayment gone up by almost R3 000 – she will have to pay an extra R1 046 520 to her bank over the 30-year period.

The effect of an extra R100 on your bond every month

Sam is shocked to see the numbers and has decided to add an extra R100 per month towards her bond. This has the following effect:

Bond AmountR1 500 000,00
Interest Rate9,75%
Term345 months
Monthly RepaymentR12 987,34
Total RepaymentR4 439 091,87
Interest PaidR2 973 491,87

By paying an extra R100 per month on her bond, Sam has reduced the repayment term by 15 months and saved R165 000 in interest.

The effect of an extra R500 on your bond every month

With and extra R100 looking so good, Sam tries to cut back on daily expenses to scrape together a total of R500. The effect is astounding:

Bond AmountR1 500 000,00
Interest Rate9,75%
Term299 months
Monthly RepaymentR13 387,34
Total RepaymentR3 841 537,26
Interest PaidR2 490 537,26

Sam has now reduced the repayment term by 61 months – more than 5 years! She has also saved a whopping R649 000 in interest.

The math is simple – the more you pay (either per month or by way of a lump sum), the more you will save.

Extra tips to save on your bond

While the most obvious solution might be to pay extra towards your bond, this might not always be possible – especially with the tough economic conditions most South Africans are currently experiencing.

If you are not in a position to add extra funds to your bond, you can renegotiate the interest on your existing home loan. This can be done directly with the bank that provided you with the loan in the first place. You can also consider approaching a bond originator who will approach the different banks on your behalf and provide you with the best possible offer.  

If interest rates rise further and you find yourself struggling to meet your bond repayments, there are always options, and here are a couple of things you can consider:

  • Rent out a portion of your property as an Air BnB, or if possible, an office
  • Rent your garage to neighbours who need extra space
  • Consider a house-share arrangement for short-term rental income
  • Start working your passion into a second steam of income, e.g. if you love photography offer your services to brides, children’s parties etc.
  • If all else fails, consider moving to a more affordable property

Becoming financially independent is the culmination of many small changes in your behaviour and your approach to money. Consider approaching a Certified Financial Planner to better understand the options available to you and how they can change your life for the better.


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Johann Rossouw, CFP, Fiscal Private Client Services