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Your house is a place to call home for your loved ones and an important part of your family’s generational wealth. But home loans are big debts that take many years to pay off. We worked out how paying a little, or a lot, extra into your bond will save you money! Lots and lots of money!
Many people view their home loan repayment as a regular, fixed monthly expense that they have to pay for the next 20 years. In truth, there is a lot you can do to reduce the term of your bond, which also reduces the interest you’ll pay over time, giving you some spare cash in your budget sooner than you thought!
Before you pay extra amounts in your home loan, make sure that:
- All of your essential monthly expenses are covered.
- All your other debt has been paid off. Your bond offers you a lower interest rate than almost any other line of credit, so there’s no point in paying off your bond if you are servicing other debts with a higher interest rate
- You have enough insurance, including life and funeral cover, as well as short-term insurance for your home, vehicles etc.
- You have emergency savings, such as three to six months’ worth of your salary.
Getting started
Here is what you will pay each month for the next 20 years on a property that costs you R1 000 000 at an 11% interest* rate:
Bond amount: R1 000 000
Monthly repayment: R10 322
Term of bond: 20 years
Total you will have paid at the end of 20 years: R2 477 252
Total interest paid over 20 years: R1 477 252
Paying double
Now, here is what your bond will cost you if you double your monthly repayments:
Bond amount: R1 000 000
Monthly repayment: R20 644
Term of bond: Reduces to 5.36 years
Total you will have paid at the end of 5.36 years: R1 328 152
Total interest paid over 5.36 years: R328 152
You will have saved: R1 149 100
Yes – that’s over R1 million saved!
Overpaying by R5 000
Let’s get real, paying double is just not within most people’s budgets! What if you pay an extra R5 000 into your bond each month?
Bond amount: R1 000 000
Monthly repayment: R15 322
Term of bond: Reduces to 8.33 years
Total you will have paid at the end of 8.33 years: R1 531 331
Total interest paid over 8.33 years: R531 331
You will have saved: R945 921!
Even if you pay just an extra R500 a month, you will still save a hefty R99 000, and pay off your home loan in 17.35 years!
Paying in a once-off extra amount
Finally, here’s a calculation of what will happen if you put your December bonus of R30 000 into your home loan account.
Bond amount: R1 000 000
Monthly repayment: R10 322
Once-off payment: R30 000
Term of bond: Reduces to 18.05 years
Total you will have paid at the end of 18.05 years: R2 235 660
Total interest paid over 18.05 years: R1 235 660
You will have saved: R241 592
R241 592 is a massive return on only R30 000. And if you pay your bonus in every year, your bond term and interest will continue to reduce in the same way.
Seeing the bigger picture
When financial advisers talk about terms and interest rates, it can sometimes be difficult to work out what the tangible benefits of paying extra into your bond will be. These calculations illustrate how powerful the effects of reducing your interest payments are. Do what you can to pay your bond off as quickly as possible and reap the benefits of financial freedom. And why not use the money you save to build even more generational wealth for your loved ones?
Note: Your savings may differ, depending on when and how you much extra you pay, and the interest rate on your loan. You can ask your home loan provider for the exact details or use online home loan calculators as a guide.
Note: We used 11% as a guide based on interest rates at the end of June 2024, prime at 11.75%
Published on: 4 December 2014
Updated on: 2 July 2024