Tempting as it may be to let an annual bonus slip slowly – or quickly in some cases – through your fingers on a big-screen TV or exotic family vacation, it’s far wiser to pay off long-term debt, such as your home loan.
“A 13th cheque can help decrease a homeowner’s debt burden, especially during a time when interest rates and monthly repayments are on the rise,” says Kay Geldenhuys, Head of Sales Fulfilment at ooba, South Africa’s largest home loan comparison service. “While it may be irresistible to spend the extra income right away, now more than ever one should take a step back and evaluate long-term financial goals first. And paying off debt should be a priority. Rising debt levels, if left unchecked, will not help consumers in the long term.”
Now is not the time to be spending frivolously. The low savings rate of South Africans, coupled with warnings of a rising interest rate cycle, means that consumers need all the help they can get to pay off debts.
South Africa’s personal savings rate is currently sitting at 0.4%. Having crept back into the black in 2017 for the first time since 2005, as cited by the SA Reserve Bank (Sarb), it’s a trend that must continue. Sarb’s second-quarter statistics show a slight rise to 71.3% in the household debt level to disposable income ratio as disposable income fell faster than household consumption expenditure.
This doesn’t mean that you shouldn’t enjoy some of your hard-earned money. “You don’t have to invest your entire bonus into your bond,” says Geldenhuys. “Even a small portion of additional income, like a 13th cheque, towards a home loan can have an enormous effect over time.”
She uses the example of a homeowner paying off a bond of R1 million with an interest rate of 10.25% over 20 years, getting a bonus of R20 000 after tax.
Paying half the bonus, i.e. R10 000, into the bond could reduce the term of the loan by almost seven months, reducing the total loan amount by over R64 500.
Geldenhuys gives the following tips for investing your bonus into your bond:
- Keep the long-term benefits in mind. Great savings can be achieved by paying off one’s home loan over a shorter period, which allows one to realise dreams over the long term. What’s more, paying excess funds into your bond means tax-free savings.
- Don’t be tempted by the season of merriment. Spending excessively on gifts, food and other festive season items may be alluring, but will not reap any financial benefits. A benefit is the extra income you will have for your household once the debt is paid off.
- Prospective homeowners should put a portion of their additional income towards a deposit, as banks are then far more willing to offer a competitive interest rate.
- If you are not sure how to save your annual bonus, prioritise your saving by choosing to pay the debt with the highest interest rate first. In most cases, this will be your credit card or home loan.
- Keep a small amount of your bonus for spending. You will be more motivated to save if you can see the results of your hard work and enjoy it by rewarding yourself.
Use our extra bond payments calculator to calculate how much you’ll save on your total home loan by making extra payments into your bond.