Tips to pay off your home loan up to 10 years earlier. But is it a good idea?
Category Advice
Given that it is such a large and long-term financial commitment, paying off your bond quicker can save you a lot of money in the long run.
You could get out of a year's worth of bond repayments - or even a whole decade's worth - by putting a little extra into your bond every month.
While it's not the right decision for every homeowner - and not possible for those on a tight budget - paying off a bond fully is a goal for some who want to be free of one of the biggest items on their monthly budget.
For those edging toward retirement this could be a way to keep costs down when you are no longer earning a salary.
Some pros include:
- Reducing your debt burden and potentially saving thousands of rand in interest, enabling you to bring down other debts or invest the money.
The biggest benefit of settling your home loan faster is that over the loan term you will save on interest costs, says Adrian Goslett, regional director and CEO of RE/MAX Southern Africa.
"Once your home is paid off, then your monthly expenses decrease, which means that more money is freed up to deposit into things such as retirement savings or other debt repayments.
"Another great advantage is that you also minimise your financial risk and when you do eventually sell, you'll make a greater ROI (return on investment) on the sale if you have less outstanding on the home loan."
Cons:
- If you decide to do this aggressively you may miss out on other financial goals or financial opportunities.
- Paying it off early could come with a prepayment penalty.
If you decide to pay off your loan fast, Rhys Dyer, CEO of ooba Home Loans, says there are some clever tricks that can help shave even up to 10 years off your bond.
Here they are:
1. Find extra cash
Cash in your emergency savings accounts and deposit those funds into your bond account. This will also give you tax benefits. Another way of raising extra cash to reduce your bond account is to sell unused furniture or appliances, such as that old tumble dryer or television set gathering dust in the garage. You could even rent out unused space on your property and deposit this rental income into your bond.
2. Pay extra into your bond
Consistently adding just R1 000 to your monthly bond payment can make a big difference.
"Let's say you buy a house for R2 million and put down a R500 000 deposit. So you have a R1.5m bond at an interest rate of 7%. That gives a monthly payment of R11 629 over 20 years.
"Now let's say you can afford to pay R1 000 more (R12 629) and maintain that every month. If interest rates stay the same, you could pay off your bond more than three years early, and save a significant amount in interest.
"If you upped that monthly amount by R2 500 - if you could afford to - you could pay off your bond in just over 13 years," says Dyer.
"The biggest problem with this approach, though, is that it requires willpower. To reap those benefits, you have to voluntarily put an extra R1 000 towards your bond payment every month."
3. Apply pay raises to your bond
One way to find extra cash to put toward your home loan is to deposit money you get from raises and bonuses.
"The goal is to put the same percentage of your income toward your bond, even when your pay goes up. In other words, if you're currently putting 15% of your income towards your bond payment, 15% of each annual raise amount should also go towards your bond, in addition to what you're already paying.
"If you're leading a comfortable lifestyle and can avoid lifestyle inflation that often follows a raise, you can put your entire raise amount towards your bond balance."
This strategy works best for those who get regular raises over and above minor cost-of-living adjustments, he says. "But, if you aren't expecting to see your income increase any time soon, this strategy might not be the best option to start with."
4. Use cash windfalls to pay lump sums
Instead of paying a little extra each month, you could pay a large lump sum here and there, suggests Dyer. "This can be done with a cash windfall, such as from an annual tax refund, 13th cheque or bonus, or inheritance."
So if you put R30 000 towards your home loan when you get your tax refund, all of your payments from there on out are a little more effective, because less of them are going towards interest.
5. Set a target pay-off date
"Setting a target pay-off date allows you to know exactly how much extra to pay each month to be bond-free by a certain date," says Dyer. And you'll have the extra motivation of marking your calendar to plan the celebration.
There's no need to select only one method from this list, says Dyer. "Many bondholders choose a few options and combine them to pay off their loans even earlier."
Goslett of RE/MAX offers this extra advice:
6. Rent out a portion of your property
If you have a potential flatlet on your property - or one that can be converted without too much expense - or you have room to spare, consider renting out this space to tenants. You can then deposit the generated income straight towards bond repayments.
7. Treat the loan as a savings account
Adding just a little extra money - ie, more than the required minimum monthly instalment - to your monthly bond payment can make a big difference.
By moving any excess money into the home loan account each month, you'll be decreasing the outstanding capital balance and reducing the loan term as a result.
If you have an access bond facility, you can treat your bond as a savings account by depositing any extra cash you might have into the loan account. You can then later access this capital through your home loan if an emergency arises, says Goslett.
Author: IOL