We break down the financial jargon definitions and help you come to terms with what you should know

If you don’t have a background in finance, concepts such as repo rate, prime interest rate, compound interest or equity can be slightly overwhelming. Add to that a mind-boggling assortment of industry jargon and cryptic acronyms like RTI and HOC among others, when contemplating a home loan – urgh! Relax, help is on hand to make this jargon understandable.

Interest
Interest on loans has been around since the dawn of civilisation. Simply put, it is the price you pay to borrow money or the cost you charge to lend someone money. 

Interest Rate: This is the percentage that’s charged for the use of the money you are borrowing. The interest rate charged is the percentage of the total amount loaned or borrowed.

Repo Rate: This term often makes the news headlines. Simply put, this is the interest rate at which the South African Reserve Bank lends money to commercial banks in the country. It is set by the Reserve Bank’s Monetary Policy Committee and is adjusted for the purpose of keeping inflation below the target limit. 

Prime Interest Rate: This is the basic interest rate charged by banks to loan you money. It is generally set at 3.5% above the repo rate. As it is linked to the repo rate, a change in repo rate will see a corresponding change in the prime interest rate.

Personal Interest rate: The banks will weigh up an individual’s credit worthiness and charge them interest at below, even
or above the prime rate. So a good credit rating, for example, could attract an interest rate of prime minus 2%. 

Compound Interest: This is a term relating to a long-term investment. It literally means earning interest on interest on interest. As an example, R1 000 invested at 10% after a year equals R1 100 and in year two equals R1 210 and R1 331 in year three… 

Home Loans
This is the big-ticket loan agreement that most of us will enter into at some stage of adult life.

Credit Score: This is your credit worthiness rate, scored between 0 and 999. Aim for a score of above 650. It is calculated based on factors such as your level of debt and how timeously you pay your bills. 

RTI: This is an abbreviation for Repayment to Income and refers to the percentage of your gross income that will go towards your bond repayments. The legislated maximum RTI is 30%, meaning that your repayment can’t be above 30% of your  monthly income.

Home Loan Term: This is simply the agreed repayment period. The choice is normally between 20 or 30 years. A 30-year bond means lower monthly repayments with a higher interest rate, while a 20-year bond means higher monthly repayments with a lower interest rate. The same principle applies to car finance (54, 60 or 72 months).

Bond Protection: This is a life assurance policy on the life of the borrower to cover the amount owing on the bond.

Capped or Fixed Rate Bonds: The home loan interest rate is fixed for a period of time. Fixed rate bonds’ interest repayments therefore won’t fluctuate if the prime lending rate is adjusted.

HOC: Abbreviation for Home Owners Comprehensive Insurance. An insurance policy that covers loss or damage to immovable property. 

Equity: Equity in a bond is the amount of additional money you’ve put in, over and above your minimum repayments. This equity can be withdrawn if you have an access facility. Equity in your property, however, is the amount by which your home’s value has increased since your loan was granted.

Always remember that if you don’t understand something in any loan agreement, insist on an explanation, so that your documentation does not add to your stress.

Words by Wynne Hartel
Photography: Pexels