Unless you are superwealthy and can pay cash for your home, you will have to pay your bond instalment every month. It’s tough because it is probably the biggest expense you will have to service. However, if you manage your bond repayments properly, there are some real, long-term benefits
I have recently bought a property to the value of R760 000 over a 20-year home loan term. I want to pay it up within a shorter period so I can buy another one before I turn 55. I am 50 years old. According to the contract, I am supposed to pay R8 765.76 and I have increased the monthly payments to R10 000 a month.
THE EXPERT ANSWERS
Tommy Nel, head of credit at FNB Home Loans, says if you are not yet using your bond as a savings tool to build a little nest egg that you could access if you needed funds in the future, it’s a good idea to start now.
Increasing the repayments on your home loan facility above the minimum requirement will create financial flexibility for homeowners to deal with unexpected financial pitfalls.
Most home loan customers underestimate the power of their home loan as a very sophisticated money management tool.
If it’s managed in a disciplined way, it can give you the financial flexibility to weather the tough times that life might throw at you.
A home loan is relatively cheap because it is a secured loan. This means the loan is protected by using your home as an asset.
Consumers often resort to using personal loans and unsecured credit to finance unforeseen expenses, or when they start experiencing cash flow pressures.
However, given the risk factors associated with these types of loans, the interest rates on unsecured credit are usually well in excess of interest rates on your bond.
These loans are not the best choice when considering ways to borrow money.
HOW IT WORKS
To use your home loan as an effective savings tool, you will need to prepay into your account.
Prepaying means that you will need to put additional cash into your home loan account.
This additional cash works for you by reducing the outstanding balance that you will be charged interest on.
If you consistently repay more than the minimum, your loan balance reduces much sooner. This has two benefits – you can pay off your loan sooner, or you can have access to prepayments in future when and if needed.
On a normal, 20-year home loan for a R1 million house, paying the minimum instalments at 0.25% below prime, 9.25%, will cost you R9 159 a month.
Increasing your repayments by 10% to R10 075 will allow you to pay off your loan in 189 months – that is four years sooner.
It will also give you access to funds of just under R70 000 within five years of keeping up these additional payments. Your total interest saving under this option will be 25%.
Obviously, the more you pay into your bond, the further the benefits will stretch.
Increasing your bond repayments by 30% to R11 907 will give you almost R600 000 in savings on your total interest paid, and you will pay off your bond nine years sooner than the 20-year term.
Paying more than your minimum required repayments should be your first port of call when looking for ways to be financially flexible.
If you start now, you will quickly create surplus cash in your account that you can use, instead of taking out short-term loans.
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