“I have been paying extra into my mortgage each month but it still taking a long time to pay if off”, says Martha, a reader who wonders if it would make sense to rather take out a personal loan over five years and use the money to settle her mortgage. Her logic is that this would allow her to pay off her home loan faster, even though the interest rate on the personal loan was 19% versus 10.5% on the home loan.
Martha is not the only homeowner to be confused by how a home loans works. A few months ago, we wrote about why it takes so long to pay off your home loan and the massive benefit of paying in extra to your mortgage each month. What Martha is not aware of, is that she could pay off her home loan over five years without taking out a personal loan and that by doing so she would save over a hundred thousand rand.
Martha has her home loan with Nedbank, so we asked Thozama Mochadibane, Head of Nedbank Retail Home Loans, to provide Martha with a solution.
Listen to Maya and Mapalo discussing this and other topics on the My Money, My Lifestyle podcast.
Currently Martha has an outstanding balance of R421 000. She has 179 months remaining on her home loan (14.9 years). Her required installment is R4 956 at an interest rate of 10.5%.
Martha is currently paying R6 500 a month into her mortgage. At that rate she will have paid off her mortgage within 97 months (8.1 years). If Martha wanted to pay off her home loan in five years, she would need to increase her installments to R9 050.
The calculation below is a comparison between a personal loan and a home loan based on the basic instalment only. Insurance premiums and the monthly service fees are not included.
It is quite clear from this table that Martha will pay higher instalments for the personal loan, as well as a higher total debt repayment. If Martha opted for the personal loan, she would spend R112 337 more on interest.
A home loan is the cheapest form of credit and the best way to finance a property. If you can afford to, you can pay off the home loan as quickly as you want.
“We endorse the consumer’s action of paying more than her monthly instalment into her home loan account in order to reduce the term of her loan. Lump-sum payments are even more advantageous to the term and the total amount to be paid by the consumer,” says Mochadibane.
He adds that it seldom makes sense to use a personal loan to settle a home loan: “While there may be circumstances where this may make economic sense, for example, when the balance outstanding on the bond is extremely low and the term remaining shorter; however, even in such circumstances, it is advisable for clients to seek guidance from an accredited financial adviser who will assist them with making the right decision.
“It’s also important to note that every situation should be dealt with on its own merit, based on the history of the account, conduct, payment patterns, and, most importantly, the interest rate factors.”
Using a personal loan to avoid bond registration costs
Some homeowners opt for a personal loan over a bond in order to avoid bond registration costs. For example, on a R500 000 property the bond registration costs could be as much as R20 000. If you did not have the money to cover the bond registration, it would be added to your home loan, bringing the total amount borrowed to R520 000.
If we compare a five-year R520 000 home loan to a five-year R500 000 personal loan, which one costs you less?
The home loan still works out less expensive by R108 200. You can also negotiate the bond registration costs with your bank.
This article first appeared in City Press.
I have an outstanding bond payment of R750K and about to be retrenched with a pension of R2 million and a package of R600K. How can I settle that bond payment – should I use the pension of R600K and suffer the tax man although knowing that I have a roof under y head.
Looking forward to hear from you.
This is not advice I can give as there are many other factors. Here are some things to consider:
You can take R500k tax-free. That means you only pay tax on the remaining R100k of the package.
It would be best to not touch your pension at this stage and rather see if you can find other work to meet your obligations. There is always the option to do a one-off withdrawal before retirement if you are in a preservation fund. It will be fully taxable however.
Will the personal loan be better if the interest rate equals the one of home loan ? I am considering the personal loan should the interest be equal or the difference is less than 3%.
Please advise
It would be highly unlikely that you would get a similar interest rate on a home loan and a personal loan. The best way to compare is on TOTAL COST. So if you have a quote for a home loan (ask for one over the same period of time that you want to take the personal loan) compare to the quote for a personal loan. The total amount paid (fees and interest) will help you decide. One point to consider is that in terms of credit score a home loan is considered “better” debt than a personal loan
Hi,
I work for the Bank & i get home loan interest of 7.25% and 10.5% on Personal loan as benefits.
As mentioned, look at total cost over the period to make a comparison. So add in bond registration costs etc. Again a home loan is viewed as better debt in terms of credit score
Hi Maya –
What are your views on deliberately not paying off your home loan early because you’ve effectively pegged your living costs (versus a 10% rental increase each year) and with inflation (assuming your income keeps up with inflation) your living costs should effectively reduce each year so in 10/15 years your bond repayments are proportionally a much smaller living expense.
Given that most people’s homes are their largest asset (or at least one of them) by paying off your home loan early you’re just pouring money into a South African-based investment.
Depending on one’s assets, would it not be better to rather invest that money offshore because one could probably safely assume that if a primary residence is included in a net-worth calculation, most homeowners are under-weight on offshore assets.
What are your thoughts on this?
Regards,
David
ps – the same goes for any capital expenditure on that property – should one renovate and increase the value of a ZA property or should one send the money overseas? I guess that’s more of a head/heart/lifestyle choice as well.
It is a valid argument and one that I have heard before. I know a financial adviser who recommends to his clients that they rather increase offshore exposure and if they ever wanted to pay off their mortgage they can bring the investment back to SA. I look at this as I do all my investments – diversification. You do end up paying a LOT of interest on your mortgage – and over the last 20 years the rand has only devalued at 6.2% per annum. Your home is never an asset when it comes to your investment portfolio – it is a roof over your head, so I don’t include it in my overall portfolio.
So, personally I do pay some extra into my mortgage which will pay it off by a certain age when I want to be debt free and the rest I put offshore. Its about having specific goals and specific outcomes.
Also never think of the rand as a one-way bet…