Getting a 13th cheque? Use it to reduce your home loan, says mortgage expert
EMPLOYEES FORTUNATE enough to receive a bonus this December should consider using a portion of it to pay off t hei r home l o a ns, b e f o r e indulging in festive season spending.
This is according to Craig Deats, executive director for sales and distribution at bond originator ooba.
“Although consumers work hard throughout the year to earn a bonus and deserve to enjoy it, finding a balance between saving and indulgence is very important, especially at this time of year. They should deposit some of their annual bonus into their home loan – it’s a great Christmas gift that will result in large savings over the term of the loan.
“It is always useful to have some extra cash over the holiday period, but even putting half of your bonus into your bond can mean significant savings over the term of your loan.”
For e xample, assume a home owner paying off a bond of R500 000 with an interest rate of 9 percent over 20 years, gets a bonus of R17 000 after tax. Paying R8 500 into the mortgage could reduce the term of the loan by up to 10 months, equivalent to a saving of roughly R45 000 in instalments.
Deats says although this option is the most sensible option for forward- thinking home owners, it is sometime difficult to part with the bonus, especially if you are not seeing immediate benefits.
“Home owners need to keep the long-term benefits in mind. Instead of spending the entire bonus on Christmas presents or a short, festive season break, remember that the long-term savings could contribute to something much more significant, like a trip abroad.”
He says potential home owners should also look to save their 13th cheque lump sum towards a mortgage deposit, due to the many economic benefits a deposit creates f or prospective home owners.
“Banks look favourably at buyers with deposits and will be more open to negotiate competitive interest rates on home loans, as a result of the reduced r i s k t o t he bank. Besides improving your chances of getting your home loan approved, a bigger deposit could result in a more favourable bond rate that will save you thousands in interest over the term of the loan.
“As a home loan is paid back over a long period, generally between 20 and 25 years, even a small reduction in the interest rate on your bond can save you thousands of rands in interest payments over time,” says Deats.