By Rudi Botha, CEO of BetterBond
If you have a R1m home loan, payable over 20 years at the current prime interest rate of 10%, you are set to pay more than R1,3m in interest by the time you’ve paid off that bond and the home is finally yours.
But if you could pay it off in 10 years, you would save R730 350 in interest – and be able to live free of a monthly bond instalment in your own, fully paid-for property.
That is the dream for an increasing number of homebuyers, and while it may be difficult, it is not impossible. On a R1m bond, what it requires currently is an additional monthly repayment of R3 565 into your home loan account.
Looked at another way, you would need to add a total of R427 800 to your bond repayments over the first 10 years (120 months) of your 20-year bond, to save R730 350 in interest. That’s like getting a 70% return on your investment. Even better, at the end of that process, the property would be yours and you would have no monthly instalment to pay.
Unfortunately, most borrowers don’t have an extra R3 565 available every month, especially if they are first-time homebuyers, so they need to look at alternative plans for becoming “bond free” as quickly as possible.
Buy a less expensive home
The best is to buy a less expensive home, if possible. On a bond of R750 000, for example, the minimum monthly repayment to pay the home off in 20 years is some R2 400 a month less than on a bond of R1m, while the additional monthly repayment to pay the home off in 10 years is some R2 700.
Thus buying a cheaper property might well create the necessary budget leeway to pay it off in 10 years – and once again save a huge amount of interest. And if the property is then too small, for a growing family for example, it can be sold and all the proceeds used to pay a really substantial deposit on a bigger, more expensive home, which will once again give you the opportunity to pay it off faster.
Pay a bigger deposit
You can achieve the same sort of effect by paying a bigger deposit to reduce the R1m loan, but saving an additional 20% or 25% of the property purchase price is usually extremely difficult for first-time buyers who are also still paying rent. This is why you should rather buy something less expensive that you can also live in while starting to pay it off as soon as possible.
We still recommend a deposit of at least 10%, however, to improve the chances of being approved for a home loan, at the best possible interest rate. At the moment, a rate concession of just 1% on a R1m bond would reduce the minimum monthly repayment by around R650, and if just that amount were to be ‘re-invested’ back into the bond, it would be paid off in under 17 years.
Rent out your unused space
Many people are making extra cash these days by using Airbnb to rent out a spare room to travellers, or letting their granny flat, garden cottage or converted garage to a student. Although this income is taxable, there should still be enough left over to help bring your ‘bond liberation day’ significantly closer. Paying an additional R1 000 a month off a R1m bond will cut almost five years off the repayment period and save R359 000 worth of interest.
Use your annual bonus
Pay your annual bonus or any other lump sums of money you receive into your bond account. Tax refunds, gifts and any money you might inherit can all help to shorten the life of your bond.
Boost your income
Find a way to earn extra money. Take extra shifts at work, make and sell something at your local weekend market, or look for some evening, holiday or freelance work to bring in additional income that you can put straight into your bond account. You should also look at selling unwanted goods and assets for extra cash to put towards this worthy cause.
Curb your spending
At the same time, keep a tight rein on your budget and eliminate all unnecessary expenditure. Every little bit you can save and add to your monthly instalment will bring you that much closer to the day when you have no bond left to pay off.
This article first appeared in City Press.
Hi Maya
Im thinking of selling my house. It’s a 20 year bond. We bought the house for R585000, 10 years ago. Bond is sitting at R455000 still owing. If we sell do they do a deduction of interest that I’ve already paid? How does the costing for final bond amount work?
You would have to settle the outstanding bond balance with the sale of the house – so that would be R455 000.
I owe the bank R16 000 on my home loan. This means I’ll settle pretty soon. What happens after that and what are the costs involved (such as fees payable to the cancellation attorney)
https://mayaonmoney.co.za/2019/10/what-happens-when-you-pay-off-your-home-loan/
The attorney costs are around R5000
Is it advisable to use my savings to reduce my home loan, so to paid it off in a shorter period
You need to have a dual strategy of building up longer term investments and paying off your mortgage. Rather take a dual approach and increase your mortgage repayments but also keep investing
How can I pay 590 000 home loan, with 140000 deposit in 10 years
I always use this calculator https://www.nedbank.co.za/content/nedbank/desktop/gt/en/personal/tools-and-guidance/calculators.html
It depends on what interest rate you get but when I used the calculator it showed an installment of R5300 per month to pay off in ten years
If property investment is your preffered choice of investment. Would you pay off your investment property’s bond quickly versus keeping it in cash. Given that you will end up reducing the interest portion of the bond which is reducing the tax deductible, does it make sense to keep the property leveraged, or pay it off. Obviously, the income from the rent is there, but then there is a higher tax on that income because of the tax deductible being reduced. Which would be your suggestion, pay off the bond quicker, or keep it leveraged
Tax should not be the main decision driver – you need to look at your entire investment plan with the property. If you are just leveraging to save tax, that would not make sense as you are still paying interest. If you are leveraging to buy another property – then that could make sense
If I have savings in the UK should I bring them to SA to reduce my Bond? Or is money overseas best left overseas?
Great question which is easily answered with a crystal ball :). If it is your only savings then you could use it to start building up a wealth base – wealth creation is not just about paying off your home loan.
However if you have lots of savings in a well-diversified investment portfolio with good offshore exposure, then you could use these UK savings to lower mortgage.
Finally, you could use a portion to invest and a portion to settle debt.
In terms of the currency, both the ZAR and UK pound are likely to weaken – not sure to what degree relatively
If I choose to keep my bond account open long after my bond is paid, can I still use the excess money to buy a vehicle if I have no intentions of taking a second bond?
You can use your bond as a credit facility
Hmmm… Not sure that’s a great idea.