Pay off your home in 10 years

George Herald - Private Property - - Property News -

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 R1,3mil­lion 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 in your own, fully paid-for prop­erty, free of the monthly bond in­stal­ment.

"That is the dream for an in­creas­ing num­ber of home­buy­ers, and while it may be dif­fi­cult, it is not im­pos­si­ble," says Rudi Botha, CEO of Bet­ter­bond, SA'S big­gest bond orig­i­na­tor. "On a R1-mil­lion bond, what it re­quires cur­rently is an ad­di­tional monthly re­pay­ment of R3 565 into your home loan ac­count. Looked at an­other way, you would need to add a to­tal of R427 800 to your bond re­pay­ments over 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 in­stal­ment to pay."

Un­for­tu­nately, he says, most bor­row­ers don't have an ex­tra R3 565 avail­able ev­ery month, es­pe­cially if they are first-time home­buy­ers, so they need to look at al­ter­na­tive plans for be­com­ing "bond free" as quickly as pos­si­ble.

"And the best 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 some R2 400 a month less than on a bond of R1-mil­lion, while the ad­di­tional monthly re­pay­ment to pay the home off in 10 years is some R2 700.

Thus buy­ing a cheaper prop­erty might well cre­ate the nec­es­sary bud­get lee­way to pay it off in 10 years - and once again save a huge amount of in­ter­est.

And if the prop­erty is then too small, for a grow­ing fam­ily for ex­am­ple, it can be sold and all the pro­ceeds used to pay a re­ally sub­stan­tial de­posit on a big­ger, more ex­pen­sive home, which will once again give the own­ers the op­por­tu­nity to pay it off faster."

Botha notes that bor­row­ers can achieve the same sort of ef­fect by pay­ing a big­ger de­posit to re­duce the R1-mil­lion loan, but that sav­ing an ad­di­tional 20% or 25% of the prop­erty pur­chase price is usu­ally ex­tremely dif­fi­cult for first-time buy­ers who are also still 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 their 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 're-in­vested' back into the bond, it would be paid off in un­der

17 years."

As for those who have al­ready pur­chased a prop­erty and would like to pay it off faster, he says they should con­sider the fol­low­ing sug­ges­tions:

Rent out your un­used space. Many peo­ple are mak­ing ex­tra cash these days by us­ing Airbnb to rent out a spare room to trav­ellers, or let­ting their 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.­ter­

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