FINANCE: Slashing your Bond Repayment

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One of the biggest investments you will ever make is when you purchase your own property. Similarly if you utilise a loan from a bank to finance the transaction, it will most likely be the biggest debt you will ever take on, debt which could stay with you for twenty to thirty years, depending how long the bank will grant you to pay back the home loan.

The burden of Interest
The reason why a home loan becomes such an extensive debt burden is because of the interest payable. In the below example we examine the impact that an interest rate of an additional 2% can have.

Scenario 1 – Interest Rate 9.5%
Home loan amount – R 500 000
Home Loan Term – 20 years
Interest Rate – 9.5%
Monthly Repayment – R4 661
Total Payment – R1 118 557

Scenario 2 – Interest Rate 11.5%
Home loan amount – R 500 000
Home Loan Term – 20 years
Interest Rate – 11.5%
Monthly Repayment – R5 332
Total Payment – R1 279 715

While the 2% increase in the interest rate on a R500 000 home loan only results in R670 increase in the monthly repayment, it adds a staggering R161 158 of additional interest payable over the 20 year period. If, instead of paying off a higher interest rate, this additional R600 a month is paid into the bond as an extra monthly payment on a lower interest rate loan, it makes an enormous difference to the interest payable and the term of the loan.

So if you want to reduce the debt burden of a home loan significantly, ensure that you get the best interest rate possible when negotiating the loan. Do this by saving up a deposit and by keeping your credit profile strong and healthy, as these are factors the banks consider when deciding on the interest rate they will offer you on a home loan.

The term of the loan also has a huge impact on the total repayment. Consider the two scenarios below, comparing a 20-year loan term to a 30-year loan term

Scenario 1 – 20-year term
Home Loan Amount – R500 000
Home Loan Term – 20 years
Interest Rate – 9.5%
Monthly Repayment – R4 661
Total Repayment – R1 118 557

Scenario 2 – 30-year term
Home Loan Amount – R500 000
Home Loan Term – 30 years
Interest Rate – 9.5%
Monthly Repayment – R4 204
Total Repayment – R1 513 538

Over 20 years the total amount in interest payable is R618 557. If you stretch your R500 000 bond term over a 30 year period, with the same prime interest rate, you will end up paying R1 013 537 in interest – more than double the capital of R500 000 initially borrowed.

It therefore makes sense to keep the repayment term as short as possible. Consider, for example, that when you buy a car on credit, the repayments are usually structured over a 60 month (5 years) repayment period. A car buyer can thus easily repay the credit for a R300 000 car bought over a 5-year period, but will take 20 years to pay off a home lone of R500 000. Why not apply a similar reduced repayment structure for a home loan?

The way to do this is to make extra monthly repayments into your bond.

Additional Payments per Month
Paying Extra money into your bond every month reduces the bond term – and if you shorten your bond term, you save thousands of rands in interest. Consider these two scenarios, comparing the effect of paying the minimum monthly instalment vs paying an additional R500 per month

Scenario 1 – Minimum Monthly Instalment
Home Loan Amount – R500 000
Home Loan Term – 20 years
Interest Rate – 9.5%
Monthly Repayment – R4 661
Total Repayment – R1 118 557

Scenario 2 – Minimum Monthly Instalment
Home Loan Amount – R500 000
Home Loan Term – 15.5 years
Interest Rate – 9.5%
Monthly Repayment – R5 161
Total Repayment – R955 051

If you pay just R500 extra into your bond every month, you will shorten the term by four and a half years and save R163 506 in interest. How easily R500 per month can be wasted on unnecessary expenses! Using just R500 more wisely each month can significantly improve your financial situation. And if you increase the extra amount from R500 to R750 per month, you can save a whopping R214 081 in interest and pay off your home loan in 14 years.

Extra Windfall
If you receive a bonus or a cash windfall, consider paying that into your bond account. Consider the below example:

Scenario 1 – No Lump Sum
Home Loan Amount – R500 000
Home Loan Term – 20 years
Interest Rate – 9.5%
Monthly Repayment – R4 661
Total Repayment – R1 118 557

Scenario 2 – Once-off Lump Sum
Home Loan Amount – R500 000
Reduced Term – 19.4 years
Interest Rate – 9.5%
Monthly Repayment – R4 661
Once-off lump sum – R6 000
Total Repayment – R1 086 175

On a bond of R500 000, paid back over 20 years at an interest rate of 9.5%, and extra once-off payment of R6 000 will slash your total bond repayments by R32 382 and shave eight months off your bond repayment term. It translates into a 539% return on your R6 000 investment over 20 years – certainly a smart way to invest R6 000. With proper planning, you can slash the interest burden of a home loan by thousands of rands and reduce the time period you are indebted to the bank by years. Start by getting the best interest rate and the shortest loan term possible, and then reduce both the term and the interest payable by making any extra payment you can each month and investing any bonus or cash windfall into the biggest investment you have made.

With proper planning, you can slash the interest burden of a home loan by thousands of rands and reduce the time period you are indebted to the bank by years.

Top Tips for Effective Bond Repayment

1. Put down as large a deposit as possible. Not only is your finance application more likely to be approved by your bank with a sizeable deposit, a larger deposit reduces your monthly repayment on the loan as well as the overall amount you will have to repay.

2. Negotiate the lowest possible interest rate on your bond. Even a small reduction in the interest rate on your home loan will significantly lower your monthly repayments

3. Push all extra cash into your repayment. If your primary goal is to settle your bond account as quickly and as efficiently as possible, a great way to go about it is to pay any extra cash – tax refunds, bonuses, anything – or a portion of the amount into the loan account.

4. Pay your bond as early as possible. When your finances allow it, you can make the bond payment earlier in the month as interest is calculated daily and you will then save those days’ interest payments.

5. Use your Bond account to save. When you are saving up for expensive items, keep the cash in your bond account – if you have an access facility on the account – until you need it. Once you draw the money your balance will obviously go up again, but your interest will have been tempered a bit.

By Meyer De Waal

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