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Why you should invest your 13th cheque in your bond

Spending your annual bonus on Christmas gifts or a brand new TV is tempting, but using it to pay off debt instead will save you a lot of money over time.

13th Cheque

Article summary

  • The festive season brings many temptations, but investing your 13th cheque in your home loan instead of blowing it all on gifts can save you money in the long-term.
  • With a low level of economic growth predicted for 2020, the future remains uncertain, and clearing debts should be a priority.
  • You don’t have to invest your entire 13th cheque in your home loan; just a portion of it can make a difference.

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.

Thinking long-term

Considering how stretched household budgets currently are, it can be tempting to use your 13th cheque to alleviate short-term expenses, but investing in your home loan will reduce the amount of interest you pay on it over the life of the loan and enable you to own a fully paid-up home a lot quicker.

As Kay Geldenhuys, Head of Sales Fulfilment at ooba home loans, says: “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.”

Factoring the current state of the economy into your decision

Now is not the time to be spending frivolously. Although the July 2019 interest rate cut by the SA Reserve Bank (the first since March 2018) was a positive sign, South Africa’s savings rate remains at an all-time low of zero, and the future remains uncertain.

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 10.00% 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 just over R61 100.

A handy guide to investing your 13th cheque

With that in mind, 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.

ooba home loans, South Africa’s largest home loan comparison service, offers a range of tools that can help you plan your budget, such as the Bond Calculator, which you can use to determine the size of your repayments.

They also offer a free, online prequalification tool, the Bond Indicator, which can help you determine the size of the home loan you’re likely to qualify for in the first place. If you’re looking to get your foot on the property ladder, first use the Bond Indicator to get prequalified. Then, when you’re ready, you can apply for a home loan.

How much can you afford?

Calculate the home loan you are likely to qualify for and how much you can expect to pay monthly on your bond repayments.

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