3 Ways to Get the Most From Your Home Loan
Few people know that there are ways to get the most from your home loan – be it to secure a 100% loan with no deposit required, get a competitive interest rate, or to reduce the amount of time it will take to repay the bond.
- Some buyers consider applying for a fixed-rate, especially now that the prime lending rate is at 7%, the lowest it has been in over five decades. “While the choice is a personal one, it’s worth noting that fixed rates are generally higher than the base or prime lending rate, and can only be negotiated once the bond has registered. Also, the period over which a buyer can fix the interest rate on a bond repayment is usually only one or two years,” explains Strumpher.
Thereafter, the bank will revert to the variable rate which the buyer will have to renegotiate a new interest rate on their bond repayment. “Opting for a fixed rate will also negate any savings that BetterBond could secure by approaching multiple banks for a competitive interest rate, and will end up costing more in interest over the long run.” A variable interest rate on a bond, however, means that the repayment on the outstanding balance on a bond will fluctuate as the prime lending rate increases or drops.
Pay more than is required
- If you are able to pay more than the required monthly installment on your bond, you shave years off your bond repayment period. Also, by paying off the balance sooner, you will also reduce your interest over the loan repayment period. As the following example shows, paying just
- R1 000 extra a month on a R1 million bond, at the current prime lending rate of 7%, could reduce the duration of your loan by more than four years.
Any additional funds should go into your bond
“The critical thing for any homeowner – if they have any additional funds, pay these into the bond. As an example, if you continued your bond repayment on a R1 million home at the interest rate of 10% (rather than dropping it to the current prime rate of 7%), as it was at the beginning of 2020, you would be able to reduce the bond term by about seven years,” says Strumpher.
“If you are not able to pay that much, even as little as R100 extra each month on a R 1 million bond will trim six months off your loan repayment period, and save you about R27 000,” he adds. It is not a case of taking all your savings and putting it in your bond, but rather about being disciplined to put something extra – whatever you can afford – into your bond. “Any lump sum that you can pay in addition, do. It reduces the balance, which reduces the interest which the bank will charge.”
Don’t cancel your bond
Don’t cancel your bond once you have paid the full amount. If you keep the bond open, it will still be possible to access funds if needed. Any amount you pay over and above your installment lies in an access facility and this can be accessed at a later stage and used as desired,” says Strumpher. There is a small monthly administrative fee charged by the bank to keep it open.
Many homeowners use their primary residence to access funds so that they can buy their second property, Strumpher adds. “There is no real benefit in cancelling your bond, unless you are selling the property or you are absolutely sure that you will not be needing to access funds again. The bank will keep your account open unless instructed otherwise.” Accessing your bond and paying “cash” for your second property can save you in bond registration costs.