A bit on the bond makes a difference

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SS_prop standalone0 Bloomberg MAKE YOUR MANSION YOUR OWN: Biting the bullet and paying off a little bit more on your bond eac h month can make your dreams come true a bit faster. Picture: Emile Wamsteker/Bloomberg

A small increase in a homeowner’s monthly bond repayment can make a big difference in the amount of time it takes to pay off the bond, says Adrian Goslett, chief executive of RE/MAX of Southern Africa.

“On a 20-year bond of R500 000 at an interest rate of 11 percent, the monthly repayment will be about R5 160. If the homeowner pays just R300 extra into his bond every month, he will save over R144 000 and cut the term of the bond by almost four years,” says Goslett. “This may be just a small step, but it can fast-track a homeowner’s path to financial freedom.”

He says that if a homeowner is financially stretched to the limit and is not in a position to pay additional money into his bond, he should focus on finding ways to reduce the interest payable over the term of the bond. In some cases, switching from one financial institution to another can result in a reduction in interest rate.

“On a bond of R1 million, a reduction of as little as 0.5 percent on the interest rate can result in a saving of over R76 000 over the term of a 20-year home loan.

“However, homeowners who do consider this option could face paying bond cancellation and penalty fees, which will severely reduce any benefit or profit achieved from obtaining the lower rate.”

He says even if a homeowner can get a lower interest rate through switching banks, or a general interest rate cut, he should still keep the monthly repayments at the same amount. Banks will usually reduce monthly payments automatically, according to the prime interest rate fluctuation, but homeowners can have the repayment stabilised.

“Maintaining the original bond repayment at the reduced interest rate will mean you are getting the benefit of paying extra into your home loan every month, without having to find additional money in the budget.”

Goslett says homeowners can make further savings on their home loan interest if they have access bonds where they can transfer any extra lump sums into the loan accounts, such as annual bonuses, refunds from Sars or portions of their salaries, while still retaining access to the funds.

“The interest payable on home loan accounts is calculated daily, based on the outstanding balance. This means that if a homeowner has access to the account and is able to transfer cash into the account, he can reduce the amount of daily interest charged for the period that the money is in the account.

“This is a good solution, as even if the money is only in the account for a short while until the homeowner requires it and needs to withdraw it again, the interest over that period will still be less.

“The savings on the daily interest amount might seem small, but it will add up over the term of the loan.

“Finding ways to pay off a home loan faster, or reducing the amount of interest paid over the term of the loan, can be massive steps towards realising a greater return on the investment made.

“Even in tough financial times when budgets are tight, homeowners can still make significant savings with relatively insignificant changes to their monthly budgets.

“By proactively using simple saving strategies, homeowners can effectively speed up their journey to financial freedom,” says Goslett.


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