How Your Home Loan Interest Is Calculated

Your home loan interest is calculated every day against the outstanding balance on your house. So if you decide to deposit extra money in your bond account, from that moment, you will have decreased the amount still owed on your home loan. And the smaller the amount of the loan, the less interest you will end up paying during the life of the loan.

Take the following as an example. If you received a R500 bonus at work on the 10th of this month and decided to deposit this bonus in your bond account, from the day you made the deposit, you will have lowered your home loan interest payment. And since banks tack on the accrued home loan interest on the last day of the month, you will see the benefit of a lower interest payment the following month.

Rising Interest Rates

Like it or not, eventually interest rates will change. Of course, if they fall, this means less money for you to pay; however, if they rise, expect for your payment to rise too. Even if there is only a 1% hike in the interest rate, the loan rate, which is the rate of interest you pay on your home, will significantly increase the total payment you make towards your home loan every month. Many times this puts the average home owner into financial straits. So if you do not yet own a home, but are looking to purchase one, keep in mind that interest rates could possible rise in the near future at any time.

Planning for Rising Interest Rates

The trick to planning for rising interest rates is to begin at a time when the current interest rates are stabilized and you have no problem paying your home loan. When this becomes your situation, you need to take the initiative and increase the amount you pay toward your monthly minimum payment. Doing this reduces the remaining balance and helps you save money because you will end up paying less interest in the long run.

And when interest rates do rise, you will be comfortable paying a higher amount, making the increased interest rate hurt your budget a little bit less. If you can manage to again increase the amount of money you pay each month, you can continue to pay off your loan faster; otherwise, you will slow down the time it takes to finish paying on your interest and loan.

Investing in Your Investment

So if you have wisely paid extra money towards your home loan and you have hit a financial slump in your life, this smart financial planning will now come in handy when you are having trouble meeting your minimum home loan payment. Because when you pay extra toward your payment, you are building up an advance cushion on your home loan payments; this will help you stay on track and still be able to finish paying on time. Of course, when your financial situation improves, you can continue making increased payments once again.