How to shave R600 000 off a R1m bond

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Financial adviser and Fin24 user Anton Muller shows how you can repay a R1m home loan over 20 years and end up with over R5m in your pocket - without extreme hardship and sacrifice. He writes:

HOPEFULLY this will be of value; it's straight maths with no smoke and mirrors.

Assumptions:
 - A 30-year-old has saved R200 000 and uses this as a deposit on a R1 200 000 house;
 - Interest rate 10% (assume interest rate fluctuates above and below, to average at 10%);
 - Loan R1 000 000;
 - Repayment term 20 years;
 - Required monthly payment = R9 650, which currently represents 20% of net earnings; and
 - Income increases at 7.5% per annum on average over the next 20 years.

The borrower, if paying the minimum required above over the term of the loan, will pay R2 316 164.37 (R1 000 000 capital + R1 316 164.37 interest) over the next 20 years, with the loan being cleared when he/she is 50 years old.

Should he/she be a little smarter and understand the following:
 - Earnings tend to increase over time
 - Repaying home loan debt is probably the cheapest form of 'investing'
 - Interest 'not paid' is more tax efficient than interest earned
 - Your home loan repayments can be diverted to savings the moment the debt is gone

Assume he/she is disciplined, but budgets are tight and 'miraculous windfalls' just don't happen.

Every time a pay increase comes along, every time a bonus is received, all he/she does is contribute the same net percentage (20%) to the home loan.

A 10% salary increase means 10% more for groceries, 10% more for entertainment, 10% more for shoes etc etc – BUT 10% more also for debt.

By merely consciously contributing 7.5% more towards the home loan each year, means that:
Total interest drops from R1 316 164.37 to R710 322.30 (saving of R605 842.07).

But here comes the best part:

Instead of only being debt-free at age 50, he/she is now debt-free at age 41.
Because he/she is disciplined, this 'repayment' can now be wholly diverted to savings, and we assume the escalations continue to increase in line with earnings and manage to achieve the same 'interest rate' of 10% growth per annum.

Now, instead of being merely debt-free at age 50, he/she has managed to save R5 242 180.

All of this achieved without extreme hardship and sacrifice – just a little common sense and living within your means.

It's not magic – it's maths, and should you be lucky enough to get larger increases than 7.5% per annum, the effect is multiplied.

 - Fin24
 
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