If you have a R1m home loan, payable over 20 years at the current prime interest rate of 10%, you are set to pay more than R1,3m 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 free of a monthly bond instalment in your own, fully paid-for property.
“That is the dream for an increasing number of homebuyers, and while it may be difficult, it is not impossible, says Rudi Botha, CEO ofBetterBond, SA’s biggest bond originator. “On a R1m bond, what it requires currently is an additional monthly repayment of R3565 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 R3565 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 R2400 a month less than on a bond of R1m, while the additional monthly repayment to pay the home off in 10 years is some R2700.
“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 R1m 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 R1m bond would reduce the minimum monthly repayment by around R650 rand, 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 R1000 a month off a R1m 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.