With many individuals receiving Christmas bonuses this festive season, property owners may want to consider putting their bonus into their bond to pay it off sooner.
It’s always tempting to use a Christmas bonus for luxuries and elaborate gifts over the festive season. However, property owners may want to consider paying their bonus into their bond to reduce the interest, thereby paying it off sooner and building in a buffer for emergency circumstances.
Chris Tyson, managing director, Tyson Properties, says any additional funds paid into a bond are beneficial and the bigger the amount, the more impact on reducing the term of the bond and paying it off quicker.
Interest on a bond is calculated on the outstanding balance so additional payments reduce interest charged and thus the term of the bond.
“If a lump sum payment of R20,000 is paid into a bond with R750,000 debt on a remaining term of 20 years at an interest rate of 9,5% with monthly repayments of R6,990, the term should drop to 18,5 years – saving about R103,000 if repayment remains unchanged. If property owners don’t plan to use their bonus for anything specific, they should consider paying it into their bond,” says Tyson.
Niël Cronje, CEO, Keller Williams Southern Africa, says to invest a bonus into a bond is the best Christmas present anybody can give themselves. For example, if you had a R1m bond, where the term is 20 years and the interest rate is 10%, with an instalment of R9,650 per month, and you paid a bonus of R25,000 into it every year for 14 years, you would save R607,950 and your bond would be paid five years and three months sooner.
Another way to save money is to pay the bond instalment at the beginning of the month and not the end, as this saves thousands of rand since payment is prior to the bank's interest calculation. On a R1m bond that saves R19,200
says Cronje.
Tony Clarke, managing director, Rawson Property Group, says the earlier in the term lump sum deposits are made, the more effective they are, so putting a bonus to work in the first years of a bond is more effective than the 10th year. He says most mortgages have a flexi or access facility allowing bondholders to withdraw equity with minimal fuss.
“If a property owner has a flexi or access bond, they can use it like a savings account to keep additional funds reducing interest they pay on their loan, while having access to equity in an emergency. This money will save more in their bond than it could earn in a normal investment account,” says Clarke.
This article originally appeared in Neighbourhood, Sunday Times.