(I don't have a house yet)
My focus would be reducing the interest over the long term. Let's say I fix it whatever rate, 11% even, I want to then be able to put in 15% or 20%. But at a fixed rate, does that 15% or 20% make a difference? While with a flexi, even at a stupid rate like 15%, if I put in 20%, won't it still be better than the fixed 11%?
Do I make any sense?
I think your confusing the issue saying “putting in” 15% or 20%.
Do you mean +15% of your instalment?
It’s pretty easy to work out. Just take the capital balance remaining and subtract the “prepaid” balance of what you have against home loan to figure out what you are paying in interest.
Alternatively just take the “prepaid” amount and work the interest out against that to see what you are saving.
If you have R100k sitting in your prepaid account at 11% you are “saving” R916 a month.
Which seems like a better deal than if you were on 7% but there just because you are “saving” against a high interest rate.
So let’s break it down. Note I’ve had plenty of Klipdrift this might be a complete **** show when I see it tomorrow.
Capital Balance : R1,000,000
Interest Rate : 7%
Prepaid : R100,000
Interest per month without prepaid : R5833 per month.
Interest with prepaid subtracted : R5250
Saving : R 583 (increasing every month).
~~~~~~
Interest Rate : 11%
Interest per month without prepaid : R9166
Interest per month with prepaid : R8250
Saving : R 916
It seems pretty clear cut that a 4% interest difference is far far worse for you than not saving anything at all.
Even a 1% is going to hurt a hell of a lot over time.
My advice to people starting out is always set your debit order statically above what you are meant to pay and what you can easily afford to do.
Then you never feel the interest rate fluctuations and grow your prepaid balance over time reducing your total interest paid. Increase it whenever you can and pay your house off double quick.
