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A mortgage bond (home loan) is a loan from a bank to you so you can buy a home. The bank registers a bond (a mortgage) over the property at the Deeds Office — that means the bank has security: if you don’t pay, the bank can enforce the bond. You repay the loan over an agreed term (commonly 20 years) by monthly instalments that cover both interest and capital (the amount you borrowed).
2) The players & steps at the start
- You (the borrower): apply, provide income docs, ID, bank statements, etc.
- Bank: does affordability checks, valuation, and approves the loan and interest rate.
- Conveyancer: completes the legal work, registers the bond at the Deeds Office and charges registration fees.
- Insurers: the bank will require building insurance and often life/credit protection insurance.
3) How interest is calculated — the core idea
- Most residential bonds use a declining-balance method: interest is charged on the outstanding loan balance.
- Interest rate can be variable (prime-linked) or fixed for a period. With variable/prime-linked loans the bank can change the interest rate when prime moves.
- Banks usually calculate interest daily on the outstanding balance and post/charge it monthly (so interest accrues daily but you see it on the monthly statement).
Example of daily interest to give the idea: If your outstanding balance is R1,000,000 and the annual rate is 11%:
- Daily interest ≈ 1,000,000 × 0.11 / 365 ≈ R301.37 per day (approx).
4) The monthly instalment (the math — step by step)
Banks commonly set a fixed monthly payment that amortises the loan over the chosen term. The formula for a fixed monthly repayment is:
\text{Monthly payment }(M) = \frac{r \times L}{1 - (1+r)^{-n}}
Where:
- = loan amount (principal)
- = monthly interest rate = (annual rate ÷ 12)
- = number of months (term × 12)
Let’s do a concrete, digit-by-digit example so you can see every step:
Assume:
- Loan
- Annual interest = 11% (0.11)
- Term = 20 years → months
Step 1 — monthly rate:
r = 0.11 \div 12 = 0.009166666666666667
Step 2 — compute and its reciprocal:
(1+r)^{240} \approx 8.935015349171 \quad\Rightarrow\quad (1+r)^{-240} \approx 0.111919225756
Step 3 — denominator:
1 - (1+r)^{-n} = 1 - 0.111919225756 = 0.888080774244
Step 4 — numerator:
r \times L = 0.009166666666666667 \times 1{,}000{,}000 = 9{,}166.666666666667
Step 5 — monthly payment:
M = \frac{9{,}166.666666666667}{0.888080774244} \approx \mathbf{R10{,}321.88}
So your monthly payment would be ≈ R10,321.88.
5) How each monthly payment is split (amortisation)
Each monthly payment = interest portion + capital portion.
Month 1 example:
- Opening balance: R1,000,000
- Interest for month 1 = balance × r = 1,000,000 × 0.0091666667 ≈ R9,166.67
- Payment = R10,321.88 → capital repaid = 10,321.88 − 9,166.67 = R1,155.22
- Closing balance after month 1 = 1,000,000 − 1,155.22 = R998,844.78
Because interest is largest when the balance is highest, in the early years most of your payment goes to interest; over time the interest portion shrinks and more of each instalment reduces capital.
6) First 12 months snapshot (rounded to 2 decimals)
| Month | Interest | Capital repaid | Closing balance |
|---|---|---|---|
| 1 | 9,166.67 | 1,155.22 | 998,844.78 |
| 2 | 9,156.08 | 1,165.81 | 997,678.98 |
| 3 | 9,145.39 | 1,176.49 | 996,502.48 |
| 4 | 9,134.61 | 1,187.28 | 995,315.20 |
| 5 | 9,123.72 | 1,198.16 | 994,117.04 |
| 6 | 9,112.74 | 1,209.14 | 992,907.90 |
| 7 | 9,101.66 | 1,220.23 | 991,687.67 |
| 8 | 9,090.47 | 1,231.41 | 990,456.26 |
| 9 | 9,079.18 | 1,242.70 | 989,213.56 |
| 10 | 9,067.79 | 1,254.09 | 987,959.46 |
| 11 | 9,056.30 | 1,265.59 | 986,693.87 |
| 12 | 9,044.69 | 1,277.19 | 985,416.68 |
(You can see interest slowly falls and capital portion slowly rises month by month.)
7) Total cost over 20 years (same example)
- Monthly payment ≈ R10,321.88
- Total paid over 240 months = 10,321.88 × 240 ≈ R2,477,252.14
- Total interest paid ≈ R1,477,252.14 (that’s more than the original R1,000,000 — the cost of borrowing)
8) Real-world ways to cut interest (with numbers)
Small changes can make a huge difference.
A) Add R1,000 extra per month (consistent)
- New monthly payment = R11,321.88
- Loan is repaid in 182 months (≈ 15 years 2 months) instead of 240 months.
- Total interest paid ≈ R1,058,249.68
- Interest saved ≈ R419,002.46
- Time saved ≈ 58 months (≈ 4 years 10 months)
B) One-off lump sum of R100,000 at the start (then keep the original monthly payment)
- New effective principal = R900,000; monthly payment kept at R10,321.88
- Loan repaid in 176 months (≈ 14 years 8 months)
- Total interest paid ≈ R916,453.63
- Interest saved ≈ R560,798.51
- Time saved ≈ 64 months (≈ 5 years 4 months)
Takeaway: both steady small extras and occasional lump sums reduce interest massively. (Numbers above use the same 11% example throughout.)
9) Other practical things banks do / clauses to watch for
- Variable vs fixed rate clauses: variable (prime-linked) means your rate can move; some lenders change your monthly instalment when prime changes, others may keep instalment and change amortisation period — check your contract.
- Prepayment/early-settlement rules: some banks permit extra repayments penalty-free; some have admin fees or require notice for large lump sums. Check the bond contract.
- Bond initiation and registration costs: conveyancer fees, Deeds Office fees, valuation fees, bond initiation/admin fee — these are paid at the start or added to the loan.
- Insurance requirements: banks will usually require building insurance and often life/credit cover — these costs sit on top of the monthly bond repayment.
- Missed payments / arrears: if you fall behind, the bank will charge arrear interest and fees and may ultimately proceed with legal collection and sale in execution; always speak to your bank early if you have trouble.
- Bond cancellation: when you finish the last payment, the bank issues a cancellation which the conveyancer registers at the Deeds Office so title is free of mortgage — there are small cancellation fees.
10) Useful checklist — what to check in your bond papers
- Is the rate prime-linked or fixed, and for how long?
- How will the bank react to a prime change (monthly payment change or term change)?
- Are extra repayments allowed? Any penalties or notice periods?
- What fees are charged at initiation and monthly admin fees?
- What insurance is mandatory and what does it cost?
- What are the exact settlement procedures if you sell or refinance?
11) High-impact borrower moves
- Make regular small extra payments (even R500–R1,000) — compounds to big savings.
- Save and use lump-sum payments (bonuses, tax refunds, inheritances) to reduce principal.
- Refinance/switch to a lower rate if fees are reasonable (do the math: interest saved vs switching costs).
- Keep an emergency fund so you won’t miss payments if your income dips.
Lake Properties Pro-Tip
If you can, set up your bank account so that any extra you pay into the bond is clearly marked as capital reduction (not just an early payment). Small extras are powerful: R1,000 extra monthly on a R1m bond at ~11% slashes nearly R420k in interest and cuts almost 5 years off a 20-year term. Always ask your bank in writing how they apply extra payments (do they reduce term or next instalments?) — that tiny bit of clarity saves headaches later.
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