Financial experts agree that getting a home loan qualifies as good debt. Although the repayment may be a long-term affair, paying it off earlier saves a lot of money on interest.
Did you know that it is possible to shave off years from your home loan repayments? Some methods of achieving this require access to extra cash, while others rely on having the discipline to draw up a strict budget — and stick to it.
Lee Mhlongo, FNB Home Finance CEO, says the past few years have seen a surge in the number of customers who no longer want to wait the standard term to pay a mortgage.
“There has been an increase in customers paying off their home loans in just over 10 years on average. Even at the height of the credit crunch from 2009 to 2011, customers were still paying off their bonds within 12 years.”
THE PRACTICALITIESIn South Africa, paying off a home loan early is a relatively new concept as traditionally, clients have stuck to the 20-year model. Refilwe Moloto, investment and strategic adviser and CEO of Ambassador Advisory, states that part of the increase in shorter mortgages can be attributed to the fact that reasons for owning a home have changed in certain parts of the market. “A new generation of people own homes as investment vehicles; buying them for flipping is a good example of this.”
Many homeowners are not aware that interest rates are calculated daily. This means that the earlier in the month you pay, the less interest you accumulate. This can cut years off of your loan in the long run. “While making your scheduled repayments will work, it is in your best interest to repay your bond ahead of schedule,” says Mike Greeff, CEO of Greeff Christie’s International Real Estate. He adds that implementing steps to do so could shave a few years off your bond, and save you the added interest. If your salary date does not allow you to use this option, you have other ways to shorten this timeline.
PAY MORE THAN REQUIRED
Bonds are structured in such a way that at the start of repayments, you pay a much higher amount towards interest than capital. This means that a huge chunk of your repayment goes towards the interest. Rudi Botha, CEO of bond originator BetterBond, implores homeowners to become more aware of the benefits of saving by paying an additional amount off every month.
“There aren’t many other savings options these days that can guarantee you that kind of return, while also delivering a fully-paid-for property,” Botha says. By paying more than required, you are cutting into the interest faster. This requires the disposable income to afford it consistently, as well as the discipline to stick to it for the long haul.
RENT IT OUT
Having rental income is a traditional way of paying a bond off quicker. Having other people finance your bond sounds like an easy win, after all. Pieter Piek, sales manager at Just Property Invest, says this is a goal within reach for most.
“It is a challenge, but not impossible, to buy a property that can be rented for the full bond repayment. Serious research and good advice is essential when choosing the property.” However there are several factors to consider, the most important being that the rental covers the bond amount. In order to have a better chance of this, the property needs to be fairly new or in good condition, and with adequate security measures. Also, assess whether your tenants will take good care of it.
PAY ANY LUMP SUMS TOWARDS YOUR BOND
Whenever you get a cash injection in the form of a 13th cheque, bonus, commission, tax return or even an inheritance, put it straight into your bond. Shaun Rademeyer, CEO of BetterLife Home Loans, notes that making as many lump-sum deposits as possible can help to reduce the overall amount.
“Deposit the money with the instruction that it is to be used to reduce the capital portion of the loan.” Even if you only do this two to three times a year, the results will add up quickly. You need to have minimal other debt, otherwise those other demands will eat into the amount you can contribute.
APPLY PAY RAISES
Rhys Dyer, CEO of home loan comparison service Ooba, says you should aim to put the same percentage of your income toward your bond, even when your pay goes up. “If you’re leading a comfortable existence and can avoid the lifestyle inflation that often follows a raise, you can put that entire amount towards your bond balance.” However, this only works if you work in an industry that offers increases regularly, or if the raise is more than your cost-of-living adjustments.
Once your bond is paid up in the chosen amount of time, you will have to notify the bank 90 days ahead of time to avoid penalties, should you want to close the bond account. You can also opt to keep the loan so you can have an access bond. Either way, paying off a home loan early is a huge milestone.
Lephoi Mokgatle, executive head of Nedbank Home Loans Digital, lays out some of the advantages of paying off your home loan earlier.
You save on interest
In the long term, the biggest cost in bond repayments is interest. For example, a bond of R800 000, with a monthly repayment of R7 327 over 20 years, will give you a total repayment of R1 758 464, with R958 464 of it being interest. If you took double the monthly instalment, you would have reduced the bond to six years, saving R716 221 in interest. Even if you can’t pay double, any extra amount will significantly lower interest.
Normally, if you make a profit on property, you have to pay capital gains tax (CGT). But, SARS considers the first R2 million gain on the sale as CGT-exempt. If you’re not selling the house, but merely paying more into the bond, then there are no tax penalties involved.
Accumulate savings you can access in case of emergency
Paying off a bond early creates a nest egg that you can use for unexpected crises. If you choose a home loan that has an access bond, this will allow you to withdraw any additional funds that you paid into it.