Turn your bond into an effective savings tool

Turn your bond into an effective savings tool

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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
Bond amount10%7,00%Monthly Savingfrom 10% to 7%Saving over12 monthsInterest savingover 20 yearsfrom 10% to 7%
R250 000R2 413R1 938R475R5 700R113 834
R500 000R4 825R3 876R949R11 388R227 667
R750 000R7 238R5 815R1 423R17 076R341 501
R1 000 000R9 650R7 753R1 897R22 764R455 335
R1 250 000R12 063R9 691R2 372R28 464R569 168
R1 500 000R14 475R11 629R2 846R34 152R683 002
R2 000 000R19 300R15 506R3 794R45 528R910 669
R3 000 000R28 951R23 259R5 692R68 304R1 366 004
R4 000 000R38 601R31 012R7 589R91 068R1 821 338
R5 000 000R48 251R38 765R9 486R113 832R2 276 673
R6 000 000R57 901R46 518R11 383R136 596R2 732 007

Reduce interest

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 079New 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.

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