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If you have a R1 million home loan payable over 20 years at the current prime interest rate of 10%, you are set to pay more than R1.3 million in interest by the time you’ve paid off that bond and your home is finally yours.
But if you could pay it off in 10 years, you would save R730 350 in interest and be able to live free of a monthly bond instalment in your own, fully paid property. That is the dream for an increasing number of home buyers and while it may be difficult, it is not impossible.
On a R1 million bond, what is required is an additional monthly repayment of R3 565 into your home-loan account. In other words, you would need to add a total of R427 800 to your bond repayments in the first 10 years (120 months) of your 20-year bond to save R730 350 in interest, which is like getting a 70% return on your investment.
Even better, at the end of that process the property would be yours and you would have no monthly instalments to pay.
Unfortunately, most borrowers don’t have an extra R3 565 available every month, especially if they are first-time home buyers. So they need to look at alternative plans for becoming “bond free” as quickly as possible.
The best solution is to buy a less expensive home if
possible. On a bond of R750 000, for example, the minimum monthly repayment to pay the home off in 20 years is about R2 400 a month less than on a bond of R1 million. The additional monthly repayment to pay the home off in 10 years is about R2 700.
Buying a cheaper property might create the necessary budget leeway to pay it off in 10 years and save a huge amount of interest. If the property is too small, for a growing family for example, it can be sold and all the
proceeds used to pay off a substantial deposit on a bigger, more expensive home, which will give the owners the
opportunity to pay it off faster.
Borrowers can also achieve the same effect by paying a bigger deposit to reduce the R1 million loan. Unfortunately, saving an additional 20% or 25% of the property purchase price is usually extremely difficult for first-time buyers who may still be paying rent. This is why they should rather buy something less expensive that they can also live in while starting to pay it off as soon as possible.
We still recommend a deposit of at least 10%, however, to improve the chances of being approved for a home loan at the best possible interest rate. At the moment, a rate concession of just 1% on a R1 million bond would reduce the minimum monthly repayment by around R650 and if just that amount were to be “reinvested” back into the bond, it would be paid off in under 17 years.”
Those who have already purchased a property and would like to pay it off faster should consider the following:
. Rent out your unused space. Many people are making extra cash these days by using online hospitality service Airbnb to rent out a spare room to travellers. You could let your granny flat, garden cottage or converted garage to a student and although this income is taxable, there should still be enough left over to help bring your “bond liberation day” significantly closer. Paying an additional R1 000 a month off a R1 million bond will cut almost five years off the repayment period and save R359 000 worth of interest.
. Pay your annual bonus or any other lump sums of money you receive into your bond account. Tax refunds, gifts and any money you might inherit can all help to shorten the life of your bond. You should also look at selling unwanted goods and assets for extra cash to put
towards this worthy cause.
. Find a way to earn extra money. Take extra shifts at work, make and sell something at your local weekend
market or look for some evening, holiday or freelance work to bring in additional income that you can put straight into your bond account. At the same time, keep a tight rein on your budget and eliminate all unnecessary expenditure.
Every little bit you can save and add to your monthly instalment will bring you that much closer to the day when you have no bond left to pay off.
*Botha is the CEO of BetterBond
