Pay off your bond faster

Private Property South Africa
Adrian Goslett

Many consumers aren’t aware that even a small additional payment into their home loan account every month can make a big difference.

“If you have a 20-year bond of R500 000 at an interest rate of 12.5%, and you increase your bond repayment by just R300 a month, you could pay off your bond almost four years earlier and save more than R200 000 in interest,” says Adrian Goslett, CEO of RE/MAX of Southern Africa. Given the difficult economic conditions, however, many homeowners find their budgets stretched to the limit and should rather focus on saving on interest until the tides change. In order to fast-track the repayment of your home loan with the aim to save on interest, Goslett advises homeowners to secure the best possible interest rate on their home loan.

“Every 0.5% reduction in the interest rate on a home loan of R1-million represents an interest saving of more than R85 000 on a 20-year bond. Even 0.1% will make a significant difference over the life period of a bond,” explains Goslett. He advices homeowners who have a good track record in making their bond repayments in full on time to contact their bank to negotiate a better interest rate, or even consider switching from one institution to another to obtain a lower rate. “However, if you decide to switch, be sure that the cancellation and penalty fees charged are not more than the savings you can achieve,” he says.

A lower interest rate will not only significantly reduce the interest payable over the term of the bond, but it will also allow you the opportunity to pay extra into your home loan account every month. If you maintain the original repayment at a lower interest rate, you will be paying extra into your bond each month without having to find extra cash in your budget,” he says. Similarly, home owners can inform their home loan provider to keep their repayment at the current level should the interest rate drop. “Even though the interest rate is currently at its lowest in 30 years, there has been some speculation about a further possible rate cut. The banks usually decrease your repayments automatically if the repo rate is reduced. By keeping your repayment amount constant as the interest rate drops, you will be paying extra money into your bond account every month without touching your monthly budget,” adds Goslett.

An access facility on your home loan account, as well as Internet or cellphone banking capabilities, provide further opportunities to save on the interest charged on your home loan. The reason for this is simply that the banks calculate the interest on a home loan based on the outstanding balance on a daily basis. If you have an access bond, as well as Internet or cellphone banking capabilities, you can move cash into your home loan account while still retaining access to it. This will reduce the outstanding balance, and thus the interest charged daily, even if only for a few days, until you withdraw the amounts you need again. “Even these small savings on the daily interest charged can add up to a significant amount over time,” he says.

“Check the cash handling fees charged by your home loan provider and if these are reasonable, deposit any cash you have into the bond and, when needed, transfer the cash back into your current account overnight using the Internet,” explains Goslett. This could include, for example, your annual bonus or a refund from SARS, or, taking it a step further, a part of your salary. Splitting your monthly installment into two payments over the month, e.g. the 15th and the 30th of the month, you can also save on interest. If your bond repayment is due on the 31st, and you make it in two installments - one on the 15th and one on the 31st - you are saving on the daily interest over 15 days. The payment on the 15th reduces the capital outstanding for 15 days until the interest amount for the month becomes payable on the 31st. The bank’s agreement to this arrangement, instead of the usual debit order, will however depend on a solid payment record. “Paying off your home loan faster is undoubtedly one of the best investments you can make. Don’t let a tight budget stop you from taking proactive steps to do so.

By using strategies such as these, you can fast-track your home loan repayments while saving a considerable amount in interest during challenging economic times,” concludes Goslett.

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