Advice and Opinion

How to pay off your home loan sooner

Home Loan generic

Paying off your bond sooner will not only save you a lot of money; it will also put you in control of your future financial goals.

“Achieving this takes a proactive approach, discipline and an understanding of the benefits that will ultimately help you increase your wealth” says Steven Barker, Head of Home Loans at Standard Bank. “It is the little things that count and finding ways to put in a little extra money into your home loan can reduce your loan term by years.”

Here, Mr Barker shares additional tips on how to reduce your home loan period:

1. Reduce or completely cut any short-term debt before taking up a home loan:

“It’s the small things that add up, i.e. not purchasing that daily cup of coffee at R15 over 5 days and over 50 weeks a year, could mean an additional R3750 freed up to put into your bond. Similarly, cutting out that R500 a month spend on short term accounts that are not necessities means an additional R6000 saving a year. These two simple savings tips could mean around R9750 extra per year freed up to be paid into your bond, which leads to months shaved off your bond term and hundreds of thousands in interest savings,” suggests Barker.

2. Pay your bonus or surplus cash as a result of a salary increase into your home loan:

“Being disciplined by not spending this cash on other luxuries can cut years’ worth of interest off the loan term,” explains Barker.

4. If a rate cut occurs don’t reduce your monthly repayments:

Rather use this to your advantage by keeping your payments the same as before, which will count as additional payments being made allowing you to cut the lifetime of the loan.

“It is possible to pay off your bond in less than 20 years, just remember that little things can make a very big difference, and a bit of discipline goes a long way,” says Mr. Barker.

For example, say you take a loan for R 850 000 at an interest rate of 12 % per annum over 240 months (20 years). The assumption is that the interest rate remains at 12% for the entire loan term. Making additional payments to your monthly minimum installment of just R300, R500 and R 1000 can have a significant impact on the term and interest saved as illustrated below:

standard-bank-table

Mr Barker also offers advice to those looking to buy a home:

1. Before applying for a home loan, you must have a clear idea of what you can afford in terms of monthly bond installments and expenses:

“This will help you determine if you can afford the payments and the costs associated with owning a home, such as water and electricity, rates and taxes, maintenance, insurance or other unforeseeable expenses that can arise”.

2. Once you know what your monthly expenses are, check if you will have a couple of hundred rand more to spare:

“If the monthly repayments are more than what you have budgeted for, then the price of the property is beyond your means. Look for a home within a lower price range to avoid finding yourself in a position where you don’t have money left after paying your bond or spare money to save,” adds Mr Barker.

3. Further, it is best to always avoid taking a home loan that matches the maximum you have allowed in your budget for repayment:

Having additional cash in your budget means that, should circumstances allow, you could pay a few hundred rand more over and above your minimum monthly installments which, again, translates into paying your bond off over a shorter term, paying less in interest, and affording you more time to save for retirement.

4. Never underestimate the value of a deposit:

Saving for a deposit before you actually make a home purchase will not only lessen the loan amount but will give you practice on the discipline needed to save or pay off this loan amount a lot faster.