The biggest debt that people carry, and for the longest periods of their lives, is their home loan, and meeting this repayment each month can be stressful.
Carrying this pressure for 20 years may very well be something most homeowners need to endure, but if you can rather pay off your home loan quicker, you should try by all means to do so.
There are a number of ways to do this and, granted, they may not all be achievable. However, if you can even take off a few months of your home loan repayments, that will make a big difference.
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Imagine being free of home loan debt one year earlier? That is 12 extra months of not having a bond repayment hanging over your head.
Financial calculations: paying extra each month
If you have a home loan of R1.5 million, repayable over a 20-year-term:
- Your monthly payment will be R16,256
- Your total repayment amount at the current interest rate will be R3.9 million
If you take this same home loan value over a 10-year period:
- Your monthly repayment will be R21,304
- However, your total repayment amount will be R2.55 million.
This means that by paying about R5,000 more a month, you will save just under R1.4 million on your home – and have 120 extra months of not paying a bond.
Obviously though, not everyone can afford to pay this much more every month, but it does not mean that whatever extra you can pay on your bond will not make a huge difference.
If you pay an extra R4,000 each month (R20,256):
- You will pay off your home in just over 11 years
- Your total home loan amount will be R2.68 million
- You will save R1.2 million
If you pay an extra R3,000 each month (R19,256):
- You will pay off your home in 12.3 years
- Your total home loan amount will be R2.84 million
- You will save R1.05 million
If you pay an extra R2,000 each month (R18,256):
- You will pay off your home loan in just under 14 years
- Your total home loan amount will be R3.05 million
- You will save R843,000
If you pay an extra R1 000 each month (R17,256):
- You will pay off your home loan in 16.29 years
- Your total home loan amount will be R3.37 million
- You will save R528,000
If you pay an extra R500 each month (R16,756):
- You will pay off your home loan in 16.75 years
- Your total home loan amount will be R3.59 million
- You will save R304,000
If, however, you cannot commit to making regular extra payments, you can still bring down your home loan repayment term and save money by injecting your bond with once-off payments.
If you make one once-off extra payment of R20,000:
- You will pay off your home loan in just under 19 years
- Your total home loan amount will be R3.7 million
- You will save R177,000
If you make one once-off extra payment of R15,000:
- You will pay off your home loan in 19.23 years
- Your total home loan amount will be R3.75 million
- You will save R135,000
If you make one once-off extra payment of R10,000:
- You will pay off your home loan in 19.48 years
- Your total home loan amount will be R3.8 million
- You will save R91,300
As part of your strategy to pay off your home loan quicker in the current economic climate, Richard Gray, chief executive of Harcourts South Africa, says it is important that you review your budget and make adjustments for the higher interest rates.
"If necessary, adjustments should be made to prioritise paying off the home loan faster and reducing the amount of interest paid over the life of the loan."
He also suggests that homeowners consider refinancing their home loans to shorter terms or lower interest rates.
"Refinancing your home loan can be a smart move if it helps you to save money on interest and pay off your bond faster. It's important to consult with a reputable lender and weigh the pros and cons before making any decisions."
Gray advises homeowners to make extra payments towards the principal debt whenever possible, such as using a bonus or tax refund to make an additional payment.
"Even making small additional payments on a regular basis can have a significant impact over time."
Because a home loan is such a large, long-term financial commitment, Rhys Dyer, chief executive of ooba Home Loans says it can be “surprisingly easy” to pay it off at least a little early.
“You might get out of a year’s worth of payments (or more) simply by throwing a bit extra towards your bond each month.”
He provides a handful of clever tricks to consider implementing, some of which may even allow you to pay off your bond 10 years early. Others will shave off a few months or years.
“Either way, any of these options could save you money in the end and help you reach financial freedom faster. If your budget allows, consider using a combination of these approaches to really hit that debt hard.”
1. Find extra cash
Cash in your emergency savings accounts and deposit those funds into your bond account. This will also give you tax benefits.
Another way of raising extra cash to reduce your bond account is to sell unused furniture/appliances, such as that old tumble dryer or television set gathering dust in the garage. You could even rent out unused space on your property and deposit this rental income into your bond.
2. Pay extra into your bond
Consistently adding just R1,000 to your monthly bond payment can make a big difference, Dyer explains.
“The biggest problem with this approach, though, is that it requires will power. To reap those benefits, you have to voluntarily put an extra R1,000 towards your bond payment every month.”
3. Apply salary raises to your bond
One way to find extra cash to put toward your home loan is to deposit money you get from salary increases and bonuses. The goal is to put the same percentage of your income toward your bond, even when your pay goes up.
“In other words, if you’re currently putting 15% of your income towards your bond payment, 15% of each annual raise amount should also go towards your bond, in addition to what you’re already paying. If you’re leading a comfortable lifestyle and can avoid lifestyle inflation that often follows a raise, you can put your entire raise amount towards your bond balance.”
This strategy works best for those who get regular raises over and above minor cost-of-living adjustments, he says.
“But, if you aren’t expecting to see your income increase anytime soon, this strategy might not be the best option to start with.”
4. Use cash windfalls to pay lump sums
Instead of paying a little extra each month, you could pay a large lump sum here and there. This can be done with a cash windfall, such as from an annual tax refund, 13th cheque or bonus, or inheritance.
“So if you put R30,000 towards your home loan when you get your tax refund, all of your payments from there on out are a little more effective, because less of them are going towards interest.