In honour of Savings Month, SA home-owners need to become more aware going forward of the benefits of saving by paying an additional amount off their bond every month, says Rudi Botha, CEO of leading bond originator BetterBond.
“The latest Old Mutual Savings and Investment Monitor (July 2019) shows that only 25% of home-owners are currently paying more than the minimum bond instalment every month, while 5% occasionally add a lump sum such as a tax refund or a bonus cheque to their minimum monthly repayment.
“And yet one of the best investments home-owners can make is to use any additional money they have available to shorten the repayment period of existing debts, and especially their home loans,” he says.
The reason is that the amount of interest you will save by paying your home loan off early will in most cases far outweigh the returns you could hope to make by putting your savings in the bank. “What is more, these returns will be entirely tax free, and if you have an access bond your money will be easily available if you should need it in an emergency.”
Botha says the latest BetterBond statistics indicate that the average home loan granted is now around R975 000, which means that at the current prime rate of 10%, the average minimum monthly bond repayment is about R9600. “And, thanks to the way compound interest works, the home-owner who pays only this minimum amount each month will pay more than R1,3m in interest over the lifespan of a 20-year home loan.
“On the other hand, the home-owner who pays just 10% more than the minimum each month – or an additional R960 per month in the example above - will pay off the home loan in 15 years and four months – and save some R360 000 worth of interest in the process.”
That represents a return of more than 100% on the additional R177 000 invested in the home loan, he notes, “and there really aren’t many other savings options these days that can guarantee you that kind of return – while also delivering a fully-paid-for property.
“It is also worth remembering that the property itself will appreciate in value while you are paying it off, meaning that you stand to make a further return on your overall investment if you sell it.”
However, says Botha, this begs the question of whether home-owners and other consumers currently have any money available to allocate to savings of any kind. “According to the Old Mutual report, savings as percentage of household expenditure currently averages 16%, up from 14% last year, and the average rand amount allocated to savings is R2260.
“But the survey also found that savings priorities are funeral expenses, retirement, emergency/ rainy-day money and children’s education (for those with dependent children). Accordingly, the main savings vehicles currently are formal funeral, education, retirement and life insurance policies, as well as accident and disability insurance, and stokvels or savings clubs – none of which are likely to deliver the same sort of returns as putting your savings into your home loan account.
“Consequently, we would urge those home-owners who are currently still paying off a bond to seriously consider re-allocating at least some of their savings to paying an additional amount each month.”