Just because most home loans have a 20-year repayment term does not mean you have to take that long to pay off your home.
Shaun Rademeyer, the chief executive of BetterLife Home Loans, says that on a R1-million home bought with a 90% loan, you could save more than R700 000 in interest by paying off your loan in 10 years instead of 20.
“Over 20 years and at the current prime rate of 10.5%, you would pay around R1.257m in interest, taking the total cost of your home to R2.257m. However, if you paid the loan off over 10 years, you would pay only R554 000 in interest and thereby substantially lower the total cost of the property.”
The way to do this, he says, would be to pay R3 200 a month over and above the R9 000 stipulated repayment amount.
“What is more, the total of the additional amounts paid over 10 years would be only R384 000 – or just over half of the R700 000 saving in interest – so this would be really a good investment, especially when you consider that at the end of the 10 years you would also own a home that was fully paid for.
“And R3 200 a month is not such a large amount. Many families are spending that much a month on a second car, for example, and might well consider doing without that or without certain other purchases in order to pay their home off in a shorter time,” he says.
For those on a tight budget, Rademeyer says there are substantial savings to be made if you can afford to put only an additional R300 into your home loan each month.
“Just that amount will cut your loan term on a R1m home down to 18 years and save you R148 000 in interest. That represents a whopping 128% return on the additional R64 800 you would be paying into the home loan account, which in investment terms is a guaranteed return of significantly more than you could hope to earn at the moment by putting that money in savings or a money market account, or investing it on the stock exchange.”
In addition, he notes, building equity in your home by investing extra capital into your bond will give you a strong financial foundation on which to base your plans for meeting your family’s future needs.