You work for decades to pay off a home loan and, in that period, you can own four to five cars. Why is this the case?
In principle, there’s nothing stopping you from paying off your home loan early. But at the end of the day, it really comes down to what you can afford – paying off a bond at a low interest over 20 years makes sense in the short-term for some.
In recent times there has been an uptick in early settlements of home loans in SA, however.
“There has been an increase in customers paying off their home loans in just over 10 years on average,” Lee Mhlongo, FNB Home Finance CEO, told True Love. “Even at the height of the credit crunch from 2009 to 2011, customers were still paying off their bonds within 12 years.”
For cash-strapped consumers it usually makes sense to take the maximum period allowed to pay off a house and a pay off a car more quickly, though, because the interest accrued on a bond repayment is usually lower than that accrued on a car repayment.
Take a brand-new entry-level VW Golf 8 GTI and a bachelor flat of about the same price for instance.
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At an interest rate of 10%, you’d pay about R5 732 per month over 20 years if you put down a 10% deposit of R66 000. For the vehicle, with the same interest rate and a 10% deposit of R66 930, you’d pay about R12 799 per month over five years.
In both cases, the longer the payment term, the lower your monthly repayment amount and the higher the interest you’re paying. Of course, there are instances when it makes sense to own a car before you own a house. Your personal needs as well as things such as your credit profile can impact how much more interest you end up paying on debt. As far as investments go, however, very few rival a paid-up home.
Here’s how to pay off a home loan quickly.
Pay more than the minimum monthly amount
Interest on a home loan is calculated daily and compounds monthly on the outstanding balance. The interest is therefore a considerable amount right from the start of the loan period.
When a new homeowner starts paying off their bond, virtually the entire repayment goes towards interest on the loan amount. For example, on a bond of R1 million at 10,5% interest your initial repayment is R9 984, of which R8 750 goes towards the interest on the loan. So you make just a small dent (about R1 234 a month) into the capital amount of your debt. But when you pay more than the required repayment the bank usually uses the additional money to reduce your main debt.
This means you end up not just paying off interest – you also reduce the period in which you settle your loan.
Make extra payments whenever you can
When you pay off your home loan sooner the total interest payable also becomes less.
Say you pay R500 more a month on a loan of R1 million. Instead of taking 20 years you’ll be settling the loan in just more than 17 years, and reducing the total loan amount by about R231 000.The higher the extra amount you pay, the faster you’ll pay off your bond and the more the total cost will be reduced.
Even a small amount can make a difference. By paying just R150 a month extra on the abovementioned bond the loan period is reduced to just more than 19 years instead of 20, and you’ll pay about R80 000 less on the total loan amount.
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Contact your bank’s home loans division to find out by how much the additional amount will reduce your total debt and the loan term.
Expecting a bonus, stokvel payout or profit share? Pay that straight into your bond too
One-off contributions, for example when you get your bonus and pay some of the money into your bond, also make a difference.
By paying R15 000 extra just once on a R1 million bond at 10,5% interest over 20 years you’ll reduce your eventual debt by R101 000 and the loan period by about a year.
Access bonds
These bonds are known as flexi or access accounts. You can pay extra into these bonds at any time to reduce your debt, and you also enjoy access to any money you’ve paid in over and above your required bond repayment.
When the additional money is in the bond you benefit because it reduces your debt amount so you pay less interest. Plus you benefit because you can withdraw surplus money at any time.
Many people use these accounts to save their emergency funds. If you don’t have an access bond you won’t be able to withdraw any additional amounts you’ve paid in.
Additional reporting: Letitia Watson
