Weekend Argus (Saturday Edition)
Is settling your home loan early always a smart money move?
FROM the moment we start our journeys as credit users, the responsible credit use trope of “settling debt on time and in full” is drummed into us. We know the benefits of this behaviour: building a good credit history, spending within our means and getting into the habit of consolidating our finances monthly, not to mention avoiding accrual of interest on an outstanding balance.
Then you take on the biggest debt you’ll probably ever have in your name – a property – and start the clock on a 20-year countdown to finally being a fully fledged homeowner. But what happens when, a handful of years away from your final bond payment, you become the fortunate recipient of a cash windfall that could fast-track your bond status, or even better, settle it in full? Is settling and closing your bond account always the right thing to do?
It’s always a good idea to pay in extra
If you are able to pay more than the required monthly instalment on your bond, you shave years off your bond repayment period. Furthermore, by paying off the balance sooner, you will also reduce your interest over the period, says bond originator BetterBond.
If you have any additional funds, pay these into the bond. Even as little as R200 extra each month on a R2 million bond can trim seven months off your loan repayment period and save you about R95 200 in interest. “Any lump sum that you can pay in addition, do. It reduces the balance, which reduces the interest that the bank will charge,” BetterBond says.
Consider and compare interest rates
At the start of your property purchase journey, you would’ve had to decide whether to have a variable interest rate that fluctuates in line with the repo rate, or to fix the interest rate. If you chose a fixed interest rate, it’s likely higher than what a variable rate would’ve given you over the long term, so settling your bond could make more sense in this scenario.
But Terence Tobin, an independent financial planner based in Randburg, says it’s worth comparing the interest that’s being charged on your bond versus the potential returns you could make in other products. “Seldom can you get better than what is guaranteed on your bond, but sometimes you can,” he notes.
What about settling without closing?
Settling your bond using the available cash can be helpful, but you’re not under any obligation to cancel and close your bond account outright, which will trigger a cancellation charge. BetterBond says if you keep the bond account open, it will still be possible to access funds if needed.
On most bonds, any amount you pay over and above your prescribed instalments lies in an access facility, which can be accessed at a later stage and used as desired. If you do decide to settle the outstanding amount on your bond, check with your bank whether this will result in a penalty and whether there are ongoing administration fees on a dormant account.
“There is no real benefit in cancelling your bond, unless you are selling the property, or you are absolutely sure that you will not need to access funds again. The bank will keep your account open unless instructed otherwise,” says BetterBond.
And with the current climate, this could be the preferable choice for many, as Tobin points out: “As markets are at the moment, it probably is better to settle the bond, but not close it, so that when opportunities arise, you have cash available.”
Another path to growth
All financial decisions should take into account your current standing and a financial plan developed in conjunction with a financial planner. If you go the route of settling the bond, your financial plan should adjust, starting with a discussion about how those monthly repayments will be reallocated moving forwards.
Perhaps faced with the bond settlement conundrum, you’ve decided to stick to the original bond repayment plan and invest the cash windfall. Tobin says some smart uses for parking that cash could be in your emergency fund, or as a top-up for your retirement savings if they could do with a boost.
And if you and your financial planner have reviewed both of these savings pots and agreed the cash could be invested with more market exposure, equity or shares can offer some good growth.
Tobin concludes with this thought: “Equities, or shares, over time give the greatest return, but with rising interest rates at the moment, that differential in returns is very narrow.”