Words: Anne Schauffer
If you pay off your home loan early, you save on compound interest, says bond originators ooba’s Rhys Dyer. “Look at a R1m bond paid over 20 years at a 10% interest rate – your instalment would be R9,650 per month. The total cost of that R1m loan (interest and capital) over the 20-year period would be R2,316,052.” He also pointed out, that a 20-year repayment term compared to a 30, means you’re saving R843 206, with an increased monthly payment of R874.
When you add the interest to the original house price, you’re paying a great deal more than you intended to, says Simon Brown of Just One Lap. “The easiest way to pay as close as possible to the original price is to pay back more than the minimum amount the bank expects.”
Pay it off in seven years
Yes, you need extra cash every month, but not nearly as much as you’d think. Let’s say you have a 20-year home loan. You might assume that to pay it off in seven years, you’re going to have to make up roughly two thirds of the time by paying an additional two thirds more each month. That’s not how compound interest works.
Five easy steps
From the first instalment of the first year, pay an extra 10%. If your instalment is R10,000 a month, pay R11,000 a month for a year. At the end of that first year, you’ve reduced your home loan down to 15 years. Five years saved.
Let’s assume your salary increase is 6%. Increase the R11,000 bond repayment by 6%. Note – you don’t pay your 6% salary increase into your home loan, you only pay 6% of your revised bond repayment of R11,000 (R720). Do this annually and your home loan is down to 10 years. You have halved your bond repayment period.
Pay your home loan before the 1st, 2nd or 5th of the month. If you get paid on the 25th, pay it then. This will bring it down to seven to eight years.
It’s said that each of us should have three to six months’ living expenses tucked away for a rainy day. If you do, put it into your home loan rather than into a 32-day call account or fixed deposit – this way, you’re effectively earning that interest rate on that money.
If you get a 13th cheque, treat it as another month’s salary. If you can put the entire cheque into your home loan, do it, but if not, pay in the same percentage you’ve been paying for the past 12 months.
When is paying it off not the wisest decision?
Dyer says, “Usually, a home loan is the cheapest form of credit, so if you have other debt such as car finance, credit cards etc, you would incur a greater interest saving by paying off those more expensive lines of credit.”
He adds, “Additionally, if you’re an investor and are renting out the property, you could save on tax as your bond instalment is tax deductible. Should you need to raise finance in the future against the property, you’ll be incurring bond registration and other finance-related costs once again if you decide to pay off your loan and cancel the bond. The funds would not be immediately accessible and the bank may also, second time around, not approve the same loan facility at the same attractive interest rate that you enjoyed on your original home loan.”