a shocking cost
03 April 2008

Are you one of countless South Africans reeling from spiraling inflation and the current economic squeeze? Do you feel like your disposable income is diminishing and you are battling to service your credit obligations?

Homeowners have not been spared either, with financial institutions reporting an increase in foreclosures. Generally, more consumers find it difficult to service their debt. This has cast a pall on the general economic outlook.

John McGinn from Nedbank Home Loans Division says that, at times like these, homeowners might be tempted to default on their bonds. This, he adds, is not prudent given the implications that a bond repayment default has on the terms of repayment and the amount of interest charged thereafter.

McGinn says the impact of missing one repayment on your home loan can be better understood when one looks at the amount of extra money that a homeowner has to pay as a result.

For example, if you have a bond of R615 000 at the current interest rate of 14.5 percent and a repayment period of 240 months (20 years), you are expected to pay a monthly installment of R7872. Your starting balance after the first year’s interest will be R622 871 and your total repayment over 240 months is expected to be R1 8897 278.

If a homeowner skips just one payment and does not make arrangements to pay it off, the repayment period balloons from 240 months to 261 months.

You'll pay R165 312 more

Instead of paying the original R1 889 278, you will now be saddled with an amount of R2 054 590. Missing a payment, no matter what the circumstances, becomes costly in the long term.

McGinn says consumers, who find themselves under pressure and cannot fulfill their obligation to pay their home loan installment in a particular month, should make an arrangement with their financial institution and make a plan to pay off the installment as quickly as possible.

As the example shows missing even a single installment will add almost two years to your repayment period while you’ll have to shell out an extra R165 312 in interest. This is, of course, not advisable and it should only be done in the most extreme of cases, says McGinn.

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