Turn your bond into an effective savings tool
Buying a home using a bond facility is not only a long-term investment, it can also be an effective way of saving money. "With July being National Savings Month, and interest rates at their lowest in 55 years, it's a good idea to focus on the ways to make your home loan work for you," says Carl Coetzee, CEO of BetterBond.
Lower interest, bigger savings
"Homeowners are paying considerably less on their bonds than they were doing 17 months ago when the prime lending rate was 10%." BetterBond's applications for June show that the average purchase price of a home is just over R1.3 million. The prime lending rate has been at 7% since July 2020, which means that homeowners will have saved R2 500 a month since then on a R1.3 million bond, adding up to a cumulative saving of R27 500 over the eleven months from Aug 2020 to June this year.
"Our applications put the average homebuyer income for June at close to R43 000. This means that homebuyers in the R1.250 to R1.3 million price bracket have saved more than half a month's salary in the past year," says Coetzee. "This is a welcome financial reserve to have during a pandemic."
The table below shows how much has been saved on monthly bond repayments, across all price bands, with the prime lending rate dropping from 10% to the current 7%.
|Monthly bond instalment|
from 10% to 7%
over 20 years
from 10% to 7%
|R250 000||R2 413||R1 938||R475||R5 700||R113 834|
|R500 000||R4 825||R3 876||R949||R11 388||R227 667|
|R750 000||R7 238||R5 815||R1 423||R17 076||R341 501|
|R1 000 000||R9 650||R7 753||R1 897||R22 764||R455 335|
|R1 250 000||R12 063||R9 691||R2 372||R28 464||R569 168|
|R1 500 000||R14 475||R11 629||R2 846||R34 152||R683 002|
|R2 000 000||R19 300||R15 506||R3 794||R45 528||R910 669|
|R3 000 000||R28 951||R23 259||R5 692||R68 304||R1 366 004|
|R4 000 000||R38 601||R31 012||R7 589||R91 068||R1 821 338|
|R5 000 000||R48 251||R38 765||R9 486||R113 832||R2 276 673|
|R6 000 000||R57 901||R46 518||R11 383||R136 596||R2 732 007|
Another way of saving money through your bond is by paying a bit extra each month. "Every rand paid into your bond reduces the outstanding balance, meaning you pay less interest over time," says Coetzee. The South African Reserve Bank forecasts that interest rates will remain in single digits for several months yet. "If you have the financial means, instead of paying less because of the lower interest rate, try to keep paying what you were before interest rates dropped to 7%. This will significantly reduce the amount of interest owing, and shorten the length of your bond repayment." Coetzee adds that even an amount of R250 extra a month can make a difference.
As the following example shows, paying just R1 000 extra a month on a R1.3 million bond, at the current prime lending rate of 7%, could reduce the duration of a loan by almost four years.
|R1.3 million bond at 7% prime interest, payable over 20 years|
|Minimum monthly repayment = R10 079||New monthly repayment (R1 000 extra) = R11 079|
|Total loan amount (including interest) = R2 197 256|
|Total interest amount = R897 256|
|New loan duration = 199 months (16 years, 6 months)|
|Total savings on interest = R221 677|
Access to capital
Access to capital "Paying off your home loan early saves time and money by bringing down your bond term and reducing what you pay in interest, but it also gives you access to capital that can be put to great use. It could provide the deposit on another property, or finance renovations on your existing home," says Coetzee.
There are no penalties for paying off your home loan sooner than the term for which you signed up, typically 20 years, says Coetzee. "You should just let the bank know and - importantly - instruct them not to close your bond account. There may be a small admin fee involved, which differs between banks, but it's often worth keeping your home loan account open for the purpose of accessing funds again in future." You could access funds on the existing bond or property to help you pay a deposit on a new home or even finance the purchase of a new property.