Different Ways to Repay Your Mortgage (Without Earning More)
Interest is generally the biggest challenge anyone faces when paying off a home loan. Our BetterLife Home Loans CEO, Shaun Rademeyer, explains how a home loan of R800 000 at an interest rate of 9.25% can be paid off in 17 years instead of 20, and save you R178 000 (22% of your loan!), simply by adding an extra R500 a month into your bond account. At BetterLife Home Loans, we’re here to help you get the best out of your bond, so here are a few tips on how you can repay your mortgage faster.
A Comprehensive View of Your Finances
Before you even think of taking out a bond, get the rest of your finances in order. First, you need to ensure you have six-month contingency fund for emergencies in your savings account. Secondly, the more deposit you can put down on your bond from the get-go, the less interest you have to pay, so aim for a minimum of 10-20%. Thirdly, decide which of your assets are the most important – which of your investments will depreciate faster? For example: property always increases in value, whereas a car depreciates from the second it is purchased.
Split or Bi-weekly Repayment
First, check with your bank whether they charge for early payments. If they don’t, these two methods can shave years off your bond. You can pay this two ways: twice a month, or every two weeks. Twice-monthly payments mean that you’ll pay half your amount in the middle of the month, and the other half at the end of the month. This means that if your bond’s interest is calculated on a daily compounded interest basis, you’ll save quite a bit of money. The bi-weekly payments are even better. This may sound the same, but if you pay fortnightly you’ll be making 26 payments per year in contrast with 24 repayments per year on a split repayment. The bi-weekly option works even better. Here’s what you’ll save per plan on a R600 000 loan, charged at R 8.5% interest over 20 years (R5206, 94 per month):
Monthly “split” payment:
Paying R2603.47 on the 15th, and another R2603.47 again on the 30th of each month saves you approximately R50 per month over 20 years. This means you could shave two years off your bond and keep R11 948.85 in interest payments over your bond period.
The bi-weekly payment is really the ideal payment. You technically pay for a 13th month, but with a steady monthly or bi-weekly income flow you generally won’t even notice. You’ll pay your R2603.47 up to 26 times per year, meaning you’ll reduce your repayment term to just shy of 17 years, and also save R127 423 in interest.
Take a loan out for longer than you need
Interest is generally the biggest income-killer on a bond. If you’re tight on cash, rather take out a slightly longer bond than you need (just in case), but then pay it off as if you’re on a shorter bond. Take this example:
A R1 000 000 bond, at 9.25% interest over 20 years tallies to a total repayment of R2 198 080, and a monthly mortgage of R9158.67. Exactly the same bond over 15 years, however, ends up as R1 852 546.12, at R10 291.92 per month. Therefore, at a difference of only R1133.25 per month, you’ll pay your house off 5 years earlier and also save R345 533.88 in interest.
Simply round your payment up by a ten or a hundred – you are unlikely to notice the difference, but your bond certainly will. Put any extra money you have into your bond account: investment earnings, your 13th cheque, or even an inheritance. Savings account interest rates generally stand at 6%, whereas bond interest lies between 8-10%, meaning that you’ll actually end up losing 2% of your money annually by using your savings account rather than your bond. If you’re not keen to have your money “tied up” in your bond account, speak to your agent about getting an access bond.
An access bond is a way of putting all your extra money into your bond account and then being able to withdraw it at any time, so it functions like a savings account. This is fantastic for you, as you’ll be able to pay off your bond much more quickly, but still be able to access your money when you need it. BetterLife Home Loans offers access bonds, under the prerequisite that you have your repayments on a debit order and that you pay above the required amount per month, although each case is treated individually.
Play with the BetterLife Home Loan Calculator and see how you can save today, or simply call one of our helpful agents. If you would like more helpful information and tips on how to make you bond work for you, follow our blog here. BetterLife Home Loans is all about giving you the best bond we possibly can.