Sav­ing on your mort­gage

What you need to know to shorten the re­pay­ment term on your bond and pay less in­ter­est

YOU (South Africa) - - CONTENTS - By LETI­TIA WAT­SON Send sug­ges­tions for top­ics and re­quests for info to your­money@you.co.za. We may an­swer your ques­tions in this col­umn but won’t re­ply per­son­ally.

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 AMOUNTS

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.

AC­CESS BONDS

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.

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