Smart saving using your home loan
Paying off a bond earlier can save homeowners a bucket load of money, and it can also be used as an effective savings tool. So how does it all work? You prepay into your bond account. Not only do the additional funds that you pay into your bond save you interest as it reduces the term and amount of the loan, it also generates savings at an interest rate superior to that of most savings accounts.
How it works
“Prepaying essentially means that you need to put additional cash into your home loan account,” says Tommy Nel, head of credit at FNB Home Loans. “This additional cash works for you by reducing the outstanding balance that you will be charged interest on. If you consistently repay in excess of the minimum, your loan balance reduces much quicker which has two benefits in that you can pay off your loan sooner or, have access to prepayments in future, if you need it.”
On a normal, 20-year home loan of R1m, paying the minimum instalments at prime of 9.25% would cost you R9 159 a month. “Increasing your repayments by 10%, to R10 075 will allow you to pay off your loan four years sooner, as well as give you access to funds of just under R70 000 within five years of keeping up these additional payments. Your total interest saving under this option would be 25%,” says Nel.
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