A mortgage is a loan secured by property, usually real estate property. Lenders define it as the money borrowed to pay for real estate. In essence, the lender helps the buyer pay the seller of a house, and the buyer agrees to repay the money borrowed over a period of time, usually 20 or 30 years in South Africa. Each month, a payment is made from buyer to lender. A portion of the monthly payment is called the principal, which is the original amount borrowed. The other portion is the interest, which is the cost paid to the lender for using the money. There may be an escrow account involved to cover the cost of property taxes and insurance. The buyer cannot be considered the full owner of the mortgaged property until the last monthly payment is made. In South Africa, the most common mortgage loan is the conventional 20-year fixed-interest loan. Mortgages are how most people are able to own homes in South Africa.

Mortgage Calculator Components

A mortgage in South Africa typically includes the following key components. These are also the basic components of a mortgage calculator:

Loan Amount: The amount borrowed from a lender or bank. In a mortgage, this is the purchase price minus any down payment. The maximum loan amount one can borrow usually correlates with household income or affordability. To estimate an affordable amount, use a House Affordability Calculator.

Down Payment: The upfront payment of the purchase, usually a percentage of the total price. This is the portion of the purchase price covered by the borrower. Typically, mortgage lenders in South Africa want the borrower to put down 10% or more as a down payment. In some cases, borrowers may put down as low as 5%. If the borrowers make a down payment of less than 20%, they may be required to pay for mortgage insurance. A general rule-of-thumb is that the higher the down payment, the more favorable the interest rate and the more likely the loan will be approved.

Loan Term: The amount of time over which the loan must be repaid in full. Most fixed-rate mortgages in South Africa are for 20 or 30-year terms. A shorter period, such as 15 or 20 years, typically includes a lower interest rate.

Interest Rate: The percentage of the loan charged as a cost of borrowing. Mortgages can have fixed or variable interest rates. As the name implies, interest rates remain the same for the term of the fixed-rate mortgage. For variable-rate mortgages, interest rates are generally fixed for a period and then periodically adjusted based on market indices. Variable-rate mortgages transfer part of the risk to borrowers, so the initial interest rates are normally lower than fixed-rate mortgages with the same loan term. Mortgage interest rates in South Africa are expressed as an Annual Percentage Rate (APR).

Costs Associated with Home Ownership and Mortgages

Monthly mortgage payments usually comprise the bulk of the financial costs associated with owning a house, but there are other substantial costs to keep in mind. These costs are separated into two categories: recurring and non-recurring.

Recurring Costs

Most recurring costs persist throughout and beyond the life of a mortgage. They are a significant financial factor. Property taxes, home insurance, HOA fees, and other costs increase with time as a byproduct of inflation. 

Property Taxes: A tax that property owners pay to governing authorities. In South Africa, property tax is usually managed by municipal governments. The annual real estate tax varies by location.

Home Insurance: An insurance policy that protects the owner from accidents that may happen to their real estate properties. Home insurance can also contain personal liability coverage, which protects against lawsuits involving injuries that occur on and off the property. The cost of home insurance varies according to factors such as location, condition of the property, and the coverage amount.

Mortgage Insurance: Protects the mortgage lender if the borrower is unable to repay the loan. In South Africa, if the down payment is less than 20% of the property’s value, the lender may require the borrower to purchase mortgage insurance until the loan-to-value ratio (LTV) reaches 80% or 78%.

HOA Fee: A fee imposed on the property owner by a homeowner’s association (HOA), which is an organization that maintains and improves the property and environment of the neighborhoods within its purview. Condominiums, townhomes, and some single-family homes commonly require the payment of HOA fees.

Other Costs: Includes utilities, home maintenance costs, and anything pertaining to the general upkeep of the property. It is common to spend 1% or more of the property value on annual maintenance alone.

Non-Recurring Costs

These costs aren’t addressed by the calculator, but they are still important to keep in mind.

Closing Costs: The fees paid at the closing of a real estate transaction. These are not recurring fees, but they can be expensive. In South Africa, closing costs can include attorney fees, title service costs, recording fees, survey fees, property transfer taxes, brokerage commissions, mortgage application fees, points, appraisal fees, inspection fees, home warranties, pre-paid home insurance, pro-rata property taxes, pro-rata homeowner association dues, pro-rata interest, and more. These costs typically fall on the buyer, but it is possible to negotiate a “credit” with the seller or the lender.

Initial Renovations: Some buyers choose to renovate before moving in. Examples of renovations include changing the flooring, repainting the walls, updating the kitchen, or even overhauling the entire interior or exterior. While these expenses can add up quickly, renovation costs are optional, and owners may choose not to address renovation issues immediately.

Miscellaneous: New furniture, new appliances, and moving costs are typical non-recurring costs of a home purchase. This also includes repair costs.

Early Repayment and Extra Payments

In many situations, mortgage borrowers may want to pay off mortgages earlier rather than later, either in whole or in part, for reasons including but not limited to interest savings, wanting to sell their home, or refinancing. Our calculator can factor in monthly, annual, or one-time extra payments. However, borrowers need to understand the advantages and disadvantages of paying ahead on the mortgage.

Early Repayment Strategies

Aside from paying off the mortgage loan entirely, typically, there are three main strategies that can be used to repay a mortgage loan earlier. Borrowers mainly adopt these strategies to save on interest. These methods can be used in combination or individually.

Make Extra Payments: This is simply an extra payment over and above the monthly payment. On typical long-term mortgage loans, a very big portion of the earlier payments will go towards paying down interest rather than the principal. Any extra payments will decrease the loan balance, thereby decreasing interest and allowing the borrower to pay off the loan earlier in the long run. Some people form the habit of paying extra every month, while others pay extra whenever they can. There are optional inputs in the Mortgage Calculator to include many extra payments, and it can be helpful to compare the results of supplementing mortgages with or without extra payments.

Biweekly Payments: The borrower pays half the monthly payment every two weeks. With 52 weeks in a year, this amounts to 26 payments or 13 months of mortgage repayments during the year. This method is mainly for those who receive their paycheck biweekly. It is easier for them to form a habit of taking a portion from each paycheck to make mortgage payments. Displayed in the calculated results are biweekly payments for comparison purposes.

Refinance to a Loan with a Shorter Term: Refinancing involves taking out a new loan to pay off an old loan. In employing this strategy, borrowers can shorten the term, typically resulting in a lower interest rate. This can speed up the payoff and save on interest. However, this usually imposes a larger monthly payment on the borrower. Also, a borrower will likely need to pay closing costs and fees when they refinance.

Reasons for Early Repayment

Making extra payments offers the following advantages:

Lower Interest Costs: Borrowers can save money on interest, which often amounts to a significant expense.

Shorter Repayment Period: A shortened repayment period means the payoff will come faster than the original term stated in the mortgage agreement. This results in the borrower paying off the mortgage faster.

Personal Satisfaction: The feeling of emotional well-being that can come with freedom from debt obligations. A debt-free status also empowers borrowers to spend and invest in other areas.

Drawbacks of Early Repayment

However, extra payments also come at a cost. Borrowers should consider the following factors before paying ahead on a mortgage:

Possible Prepayment Penalties: A prepayment penalty is an agreement, most likely explained in a mortgage contract, between a borrower and a mortgage lender that regulates what the borrower is allowed to pay off and when. Penalty amounts are usually expressed as a percent of the outstanding balance at the time of prepayment or a specified number of months of interest. The penalty amount typically decreases with time until it phases out eventually, normally within five years. One-time payoff due to home selling is normally exempt from a prepayment penalty.

Opportunity Costs: Paying off a mortgage early may not be ideal since mortgage rates are relatively low compared to other financial rates. For example, paying off a mortgage with a 4% interest rate when a person could potentially make 10% or more by instead investing that money can be a significant opportunity cost.

Capital Locked Up in the House: Money put into the house is cash that the borrower cannot spend elsewhere. This may ultimately force a borrower to take out an additional loan if an unexpected need for cash arises.

Loss of Tax Deduction: Borrowers in South Africa cannot deduct mortgage interest costs from their taxes.

Brief History of Mortgages in South Africa

In the early 20th century, buying a home involved saving up a large down payment. Borrowers would have to put 50% down, take out a short-term loan, and face a balloon payment at the end of the term.

To remedy this situation, the government and financial institutions introduced longer-term mortgages with more modest down payments and universal construction standards.

These changes helped more South Africans afford homes, sparking a construction boom in the following decades.

Today, government involvement continues to help stabilize the housing market by ensuring affordable mortgage options for buyers.