Homeowners can reduce the term of their home loan and the total that they pay in with careful budgeting and clever tricks.
A house is usually the biggest asset that you will buy in your lifetime, but it's made affordable by the 20-year term of monthly repayments. Most people factor their monthly bond payments into their budgets, but don't think about the total value of repayments over the term of the loan.
Using the ooba calculator found at http://www.ooba.co.za/home-loan/calculators/bond-affordability-calculator, you can see that on a house bought for R1 000 000, paid off at R8 678 monthly over 20 years at an 8.5% interest rate, after 20 years, the buyer will have paid the bank R2 082 776. “However, there is a lot that you can do to reduce the term and the final total of your repayments,” says Craig Deats, ooba sales director.
The bigger the deposit, the better
It is wise to allocate whatever money you can to your deposit when applying for your homeloan. This makes your application more likely to be approved by the bank, and a R20 000 deposit on a R1 million homeloan will reduce your total repayments by R41 656.
Secure a lower interest rate
Another approach to take is to secure the lowest possible interest rate. Use an expert mortgage originator to negotiate on your behalf to get the lowest possible interest rate. “Even a small reduction will result in a significant reduction in total repayments,” says Deats.
Pay extra each month
The simplest, ongoing way to reduce the term and cost of your homeloan is to pay in a little extra each month. Using the calculator shows that even paying in as little extra as R200 a month will reduce the term of the repayments by more than a year and the total paid by R71 931. And obviously, the more you pay in, the more you save.
Pay in unbudgeted extras
Even if you're making good inroads into reducing the total cost of your bond by paying in extra each month, Deats says it should still be a primary goal to settle this debt as efficiently as possible. “Every time you have some extra cash ? a tax refund, a big commission or an annual bonus - pay some of that into your bond,” he says. “You may miss it in the short term, but in the long term you'll be much better off.”
Obviously, paying in extra at any point reduces the interest from that point onwards, so the earlier that you can make any bulk payment into your bond, the better. This is especially useful if you have an access bond, because the deposited extra money will reduce the interest you owe, but can be withdrawn again should you need it.
Beat the interest calculation
Because of the fact that interest is calculated daily, you can also, should your cashflow allow it, reduce your total repayment amount by making your bond payments earlier in the month than actually required. Each day of interest saved positively impacts the overall repayments.
“Buying a house is possibly the biggest and longest-term financial commitment that most people will get into,” says Deats. “If you make reducing your deficit a priority by bearing these tips in mind, you should be able to reduce your total repayment amount as well as the term of debt settlement.”