A bond is one of the cheapest ways to borrow money for most of us, but it can still rack up some serious interest over a typical 20 year loan term. In fact, paid off at the minimum rate over the maximum duration, you’ll usually end up paying more than 100% of the original value of the loan in interest.
“The good news,” says Mike van Alphen, National Manager for Rawson Finance, the Rawson Property Group’s in-house bond origination division, “is that banks aren’t allowed to lock you into that 20 year loan term – it’s a maximum length, not a minimum, and there’s nothing to stop you paying off your loan faster in order to decrease the amount of interest you have to pay.”
According to van Alphen, there are actually quite a few ways to pay off your bond faster that won’t necessarily put a huge strain on your finances. Here are his top three tips to being bond-free in under 20 years.
Put a little extra in every month
“The first and most obvious way to reduce your loan term is to put in extra money every month,” he explains. “You’d be surprised at what a big difference just a couple of hundred rand a month can make.”
To illustrate his point, van Alphen references the Rawson Property Group’s online bond repayment calculator. “Let’s use the average loan of R900 000 at 9.25% interest as an example,” he says, punching the numbers in. “Your minimum monthly repayments over 20 years would be R8242.80. If you bump that up to R8500.00 – that’s just R257.20 extra every month – you cut more than a year and half off of your loan term, and save R103 348.80 in interest. That’s a huge return on a very small investment – just imagine what your Christmas bonus could do.”
Use your bond as your savings account
Because of the dramatic savings a very small amount of money can make in your loan account, van Alphen strongly recommends putting all available funds into your bond as a matter of course. “Most bonds these days have an access or flexibond facility that allows you to withdraw any equity you have in the bond at any point. That means whatever extra money you’ve put in, above and beyond your minimum payments, is still available to you in an emergency, just as it would be in a normal savings account – only in your bond it’s saving you thousands of rand’s worth of interest in the meanwhile.”
Another benefit of doing this is the fact that those savings are tax-free. “Any interest you earn on a savings or investment account is subject to tax,” says van Alphen, “whereas savings on your bond can’t be taxed at all. Money you invest elsewhere is also unlikely to earn more interest than that being charged on your loan,” he adds, “which means it’s almost always better to put that money straight into your bond – it’ll save you far more there than it could earn somewhere else.”
Make your payments earlier in the month
Of course, not all of us have spare cash lying around at the end of the month, so putting extra money into our bonds isn’t always an option – especially in the first year of paying off a mortgage. Luckily, van Alphen has another simple tip to save thousands without spending anything extra at all.
“Interest on mortgages is calculated daily,” he explains, “so the earlier in the month you pay, the less interest you accumulate.” While moving your debit order a couple of weeks earlier in the month won’t make any visible difference over the short term, van Alphen reveals that it can cut over a year off of your loan in the long run and save you many thousands of rand.
“It’s not difficult to pay off your bond in less than 20 years,” van Alphen concludes. “Just remember that little things can make a very big difference, and a bit of discipline goes a long way.”