Purchasing property is one of the most significant and costly financial decisions you will ever make, especially if it’s your first home, but applying a few financial tips can allow you to pay your bond off quickly, which will benefit your future financial security and result in a great investment at a reduced end cost.
The point of buying property is not only to meet a basic human need for shelter, but can be seen as an asset that appreciates over time and regarded as an integral part of a comprehensive retirement portfolio.
That said, not many people are aware that they can pay their bond off a lot quicker than the normal agreed period and save significantly if their approach to the loan is applied with discipline.
First off, it is advisable to reduce, or completely cut any short-term debt and retail accounts that are a drain on your budget before taking up a home loan.
It’s the small things that add up, i.e. not purchasing that daily cup of coffee at R15 over 50 weeks a year could mean an additional R3 750 freed up to put into your bond.
Similarly, cutting out that R500 a month spend on retail accounts that are not necessities means an additional R6 000 saving a year.
These two simple savings tips could mean around R9 750 extra per year freed up to be paid into your bond, which leads to months shaved off your bond term.
For example, say you take a loan for R750 000 at an interest rate of 10% per annum over 240 months (20 years). The assumption is the interest rate remains at 10% for the entire loan term. Making additional payments to your monthly minimum installment of just R500 can bring your loan term down by 40 months.
Further, it is best to always avoid taking a home loan that matches the maximum you have allowed in your budget for repayment.
Having additional cash in your budget means, should circumstances allow you to pay a few hundred rand more over and above your minimum monthly instalments, it again translates into paying your bond off over a shorter term, paying less in interest, and affording you more time to save for retirement.
For first time homeowners in particular, affordability is a key consideration when attempting to pay your bond off faster. Before applying for a home loan, you must have a clear idea of what you can afford in terms of monthly bond installments and expenses.
This will help you determine if you can afford the payments and the costs associated with owning a home, such as water and electricity, rates and taxes, maintenance, insurance or other unforeseeable expenses that can arise.
Once you know what your monthly spend is going to be like, check if you will have a couple of hundred rand to spare.
If the monthly repayments are more than what you have budgeted for, then the price of the property is beyond your means. Look for a home within a lower price range to avoid finding yourself in a position where you don’t have money left after paying your bond or spare money to save.
Another way to bring the monthly repayment down so that you can afford to put in extra is by saving for a deposit before you actually make a home purchase.
Your deposit should also be at least 10% of the purchase price (with 20% for properties of R2m and more), so saving for it should start as soon as you start earning an income.
This may help you get a lower interest rate and also decrease your monthly repayments, both decreasing the cost of the loan overall and freeing up more to contribute to the loan.
Just remember that it is best to ensure that your deposit is made up from savings and not from additional loans, as this would mean that you need to pay off that loan at the same time as you are paying off the home loan, and this will put pressure on your monthly expenses.
Buying a home is a great achievement, but you need to approach your investment with caution in order to realise other financial goals you would like to achieve.
*Steven Barker is head of home loans at Standard Bank