Saving on your mortgage
What you need to know to shorten the repayment term on your bond and pay less interest
BY HOW much would paying extra (let’s say R500 a month) on your bond repayments reduce your term ? And should you pay it at any specific time, or when your debit order usually goes off?
Many people underestimate what a big difference it makes to pay an additional amount into their home loan. Whether it’s an extra R100 or R1 000 you put in, it reduces your repayment period as well as the ultimate bond amount.
The monthly repayment on a home loan is calculated on the loan amount, the total repayment period and the interest rate.
Most loans are repayable over 20 years, although some finance companies also offer 30-year bonds. Because you pay interest over such a long period, it ultimately makes your total repayment much higher than the amount you borrowed.
For example, if you have a bond of R1 million at an interest rate of 10,5% over 20 years, you’ll pay back about R2,4 million. The additional R1,4 million is interest.
HOW THE MONTHLY REPAYMENT WORKS
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, so you end up not just paying off interest – with the result the period in which you settle your loan is reduced.
THE IMPACT OF EXTRA PAYMENTS
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 settle the loan in just more than 17 years and reduce 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 years, and you’ll pay about R80 000 less on the total loan amount.
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.
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.
WHEN TO PAY
Making payments in the middle of the month has a positive impact on the total interest paid on the loan because interest is calculated daily, says Mpho Ramatong, employer schemes channel head at FNB Mortgage Cluster.
When a payment is received it reduces the outstanding capital and the subsequent interest payment is calculated on a lower capital amount, as opposed to it being paid with the monthly debit order.
PAY OFF FASTER
Ideas for extra money to pay off your bond faster is to use your annual bonus, tax refunds, gifts or any money you might inherit.
You could also look at selling unwanted goods for extra cash to put into your bond, says Rudi Botha, chief executive of BetterBond. Renting out unused space is also an option. Just remember, the extra income from rent is taxable and you must declare it.
The amount left still can help to shorten your bond life and decrease the interest you pay.
These bonds are known as flexi or access accounts. You can pay extra into these bonds at any time to reduce your debt, but you also enjoy access to any money you’ve paid in over and above your required bond repayment.
While the additional money is in the bond, you also benefit because it reduces your debt amount so you pay less interest. If at any time you need the surplus money, you can withdraw it.
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.