A Fin24 user is baffled about why her homeloan payments do not stay the same if her interest rate is...

1. Fin24.com | Bond rate riddle
A Fin24 user is baffled about why her homeloan payments do not stay the same if her interest rate is
fixed. She writes:
I always thought that if I borrowed eg R800 000 from the bank at 6.85% for 20 years, it amounts to
R6 130.57 per month (without all the insurance, admin fees, etc).
I would have thought that it would stay the same for the next 20 years, if the interest rate could
remain the same (not realistic, I know - I just used this as an example). Apparently not.
If my current outstanding about is R712 522 with about 177 months left (also at 6.85%), the basic
instalment has apparently shot up to R6 406 because it gets calculated anew each day.
This means that I will probably pay around R8 300 in the final five years of my bond, if the interest
rate remains the same. How can that be?
It doesn't make sense to me to pay more and more as my outstanding balance becomes less.
A friend of mine said this is true, but I am quite shocked at this. Please advise if this is correct and
how this could be ethical?
FedGroup sales executive Scott Field responds:
Your first assumption is 100% correct. If you borrow R800 000 at a fixed interest of 6.85% for 20
years, monthly payments of R6 130.57 will settle the debt after 20 years, assuming that there are no
insurance or admin fees, etc.
Your current balance outstanding is R712 522. If you had been paying R6 130.57 each month and
there were no other fees, your balance should be R679 591 36.
It seems that your current balance is R32 930.64 higher than it should be with 177 months to go.

2. It is not clear from your question why the outstanding balance is higher. However, if you have an
outstanding balance of R712 552 and you pay R6 406 each month, your debt should be settled over
the remaining 177 months. .
You shouldn't see an increase in this amount, assuming your interest rate remains the same.
I would recommend that you contact your bank to determine why your current balance is R32
930.64 more than you would expect.

3. Possibly there are fees or something else that you are not aware of.
- Fin24
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http://www.fin24.com/Money/Money-Clinic/Property/Bond-rate-riddle-20130305