Getting it down to ten – how to settle your home loan in a decade or less
Cutting down your bond term could save you a small fortune. But it takes careful planning and considerable mastery of your finances to do so. It's difficult — but not impossible!
If you have a R1-million home loan, payable over 20 years at a prime interest rate of 10%, you're set to spend more than R1.3 million on interest by the time that dream home is finally yours.
But what if you could pay it off in 10 years? That would save you a whopping R730 350 in interest, and enable you to live debt-free in your own, fully paid-for property. And that's the dream for an increasing number of homebuyers... but it doesn't have to remain a dream!
In fact, on a R1-million bond, if you can pay an additional R3 565 into your home loan account each month, you'll quickly cut down your bond term. In other words, you'd need to add a total of R427 800 to your bond repayments over the first 10 years of your 20-year bond term. And, in real terms, that's a sizable 70% return on your investment!
But the reality is that most first-time buyers simply don't have an extra R3 565 just lying around. So, you'll need to look at an alternative strategy to help you become bond-free as soon as possible.
It's not that hard. The first and best method is to buy a less expensive home, if possible. On a bond of, say, R750 000, you'll pay R2 400 a month less than on a bond of R1m, over a 20-year bond term. And to pay your home off in 10 years, you'll need to find R2 700, which you'll have saved anyway by buying that less expensive home.
And if you outgrow that property, you can sell it and use the proceeds to pay a really generous deposit on a larger, pricier property. Which will, once again, allow you to pay it off faster.
If you're not willing to settle for a smaller, less pricey property, you can always pay a bigger deposit on that R1-million loan — and this will have the same effect as paying a bigger instalment each month.
But saving up for a deposit that's 20% or 25% of the property purchase price is usually not that easy for first-time buyers who are also still paying rent. And that's why it makes sense to buy something less expensive that you can actually live in while paying it off as soon as you can. And it's certainly more sensible than paying rent into someone else's pocket.
We recommend paying a deposit of at least 10% to improve your chances of being approved for a home loan, at the best possible interest rate. At the moment, an interest rate concession of just 1% on a R1m bond would reduce your minimum repayment by around R650 a month. And if you reinvest that amount back into the bond, you could pay it off in under 17 years.
As for those who've already purchased their dream home, you could consider the following bond-term busting hacks:
Rent out your unused spaceThere's extra cash to be made by using Airbnb to rent out spare rooms to travellers, or by letting a granny flat, garden cottage or converted garage to a student. And, yes, this income is taxable, but there should still be enough left over to help bring your bond-liberation day that bit closer. Paying an additional R1 000 a month off a R1m bond will cut almost five years off the repayment period and save R359 000 worth of interest.
Boost your bond account with your bonusPay your annual bonus or any other lump sums of money you receive into your bond account. Tax refunds, gifts, and any money you might inherit can all help shorten the life of your bond.
Sell those unwanted, unloved itemsOne person's junk is another person's treasure! Declutter and sell unwanted goods and assets for extra cash, to expedite your bond term.
Make it earn!Find a way to earn extra cash: an extra shift at work, selling something at your neighbourhood market, or searching for after-hours, holiday or freelance work will all bring in bucks that you can put straight into your bond.
Tighten your belt!
Keep a tight rein on your budget and cut down on non-essential expenses. Every bit you add to your final monthly payment will bring you that much closer.
And while these measures seem a tad tough, just think of that blissful feeling of being bond-free!