Advice and Opinion

Be smart: put your end-of-year bonus into your bond

The festive season is fast approaching, with all the fun – and expense – that it entails. There’s no doubt that Christmas time is one of the worst seasons for budgeting, and after a year of interest rate increases and inflation, property owners may already be feeling the pinch. In fact, for many, the thought of that end of year bonus or 13th cheque may feel like something of a lifeline – a little bit of extra cash to help with the festivities. But is that really the best use of your hard-earned money?

“Think about what you spent your last Christmas bonus on,” says Tony Clarke, Managing Director of the Rawson Property Group. “Can you even remember? How about the one before that? Or the one before that? It’s so tempting to use the extra money for a little luxury here, or a better gift there – especially when times are tough – but that momentary satisfaction is fleeting, and it doesn’t actually make things any easier in the long term, or improve your life in any permanent way.”

The exact opposite is true when you put that extra money into your bond, however, and Clarke goes on to explain how doing so can actually increase the value of your bonus exponentially.

“All modern bond facilities allow for additional payments above and beyond your monthly minimum,” he begins. “Just a few hundred rand extra every month can save you tens of thousands of rand in the long term, and your end of year bonus can have much the same effect.”

To illustrate his point, Clarke uses an example of a bond-holder with a home loan of R500k at 9.5% interest. The minimum monthly repayments for the loan, based on a 20 year term, would be R4660.66, which means that bond holder probably earns a salary of around R16 000. Assuming they are lucky enough to get a R10 000 end of year bonus, and decide to put that additional money directly into their bond, that R10 000 could reduce their bond term by as much as a year and save up to R50k on their total cost of financing. That’s five times the value of the original lump sum.

“The effects of lump sum deposits increase the earlier they happen in the bond term,” Clarke notes, “so putting your bonus to work in the first year of your bond will be even more effective than using it in your tenth year, for example. The best option is, of course, to put any extra money you have into your bond right away, throughout the year – the savings really are dramatic over the long term.”

Those reluctant to relinquish their “emergency fund” to service their bond will be comforted by the fact that most mortgages have a flexi or access facility these days. This allows bond holders to withdraw any equity they’ve built up with minimal fuss.

“If you have a flexi or access bond, you can essentially use it like a savings account,” says Clarke, “keeping any additional funds you have there to reduce the interest you pay on your loan, while still having access to that equity in an emergency. That money will save you far more in your bond than it could ever earn you in a normal investment account.”

Saying goodbye to that bonus might sting in the short term, but it is, without a doubt, the best way to get the most value from your money. Besides, if you’re after Christmas miracles, making R10 000 do R50 000’s worth of work on your mortgage seems like a pretty good start!