- Given that it is such a large and long-term financial commitment, paying off your bond quicker can save you a lot of money in the long run.
- You could get out of a year’s worth of bond repayments – or even a whole decade’s worth – by putting a little extra into your bond every month.
- One or a combination of these savvy savings solutions will help you reach financial freedom that much faster.
A home loan may be the biggest debt you’ll ever take on but, because it’s such a large, long-term financial commitment, it can be surprisingly easy to pay it off at least a little early.
“You might get out of a year’s worth of payments (or more) simply by throwing a bit extra towards your bond each month,” says Rhys Dyer, CEO of ooba Home Loans, South Africa’s largest home loan comparison service.
You can pay off your bond within 10 years
Here, Dyer provides a handful of clever tricks, some of which may even have you paying off your bond 10 years early. Others will shave off a few months or years. Either way, any of these options could save you money in the end and help you reach financial freedom faster. If your budget allows, consider using a combination of these approaches to really hit that debt hard.
1. Find extra cash
Cash in your emergency savings accounts and deposit those funds into your bond account. This will also give you tax benefits. Another way of raising extra cash to reduce your bond account is to sell unused furniture/appliances, such as that old tumble dryer or television set gathering dust in the garage. You could even rent out unused space on your property and deposit this rental income into your bond.
2. Pay extra into your bond
Consistently adding just R1 000 to your monthly bond payment can make a big difference, Dyer explains.
“Let’s say you buy a house for R2 million and put down a R500 000 deposit. So you have a R1.5 million bond at an interest rate of 7%. That gives a monthly payment of R11 629 over 20 years.
“Now let’s say you can afford to pay R1 000 more (R12 629) and maintain that every month. If interest rates stay the same, you could pay off your bond more than three years early, and save a significant amount in interest.
“If you upped that monthly amount by R2 500 – if you could afford to – you could pay off your bond in just over 13 years” he adds.
You can use ooba Home Loans’ Extra Bond Repayment Calculator to determine how much you save when paying extra into your bond.
“The biggest problem with this approach, though, is that it requires willpower,” he notes. “To reap those benefits, you have to voluntarily put an extra R1 000 towards your bond payment every month.”
3. Apply pay raises to your bond
One way to find extra cash to put toward your home loan is to deposit money you get from raises and bonuses.
“The goal is to put the same percentage of your income toward your bond, even when your pay goes up,” says Dyer. “In other words, if you’re currently putting 15% of your income towards your bond payment, 15% of each annual raise amount should also go towards your bond, in addition to what you’re already paying. If you’re leading a comfortable lifestyle and can avoid lifestyle inflation that often follows a raise, you can put your entire raise amount towards your bond balance.”
This strategy works best for those who get regular raises over and above minor cost-of-living adjustments, he says. “But, if you aren’t expecting to see your income increase anytime soon, this strategy might not be the best option to start with.”
4. Use cash windfalls to pay lump sums
Instead of paying a little extra each month, you could pay a large lump sum here and there, suggests Dyer. “This can be done with a cash windfall, such as from an annual tax refund, 13th cheque or bonus, or inheritance.”
So if you put R30 000 towards your home loan when you get your tax refund, all of your payments from there on out are a little more effective, because less of them are going towards interest.
5. Set a target payoff date
“Setting a target payoff date allows you to know exactly how much extra to pay each month to be bond-free by a certain date,” says Dyer, adding that you’ll have the extra motivation of marking your calendar to plan the celebration!
The ooba Home Loans Bond Repayment Calculator is a good way to do the math here. Let’s say you want to pay off that R1.5 million bond in 15 years when your child goes to university. You’ll need to increase your payments to R13 ,482 per month. What if you want to pay off your bond in 10 years? You’ll have to increase your payments to R17 416 to achieve this goal.
Of course, there’s no need to select only one method from this list, says Dyer. “Many bondholders choose a few options and combine them to pay off their loans even earlier.”
And in the world of personal finance, every penny saved is a penny earned… so, go save yourself some interest and pay off that bond early!
If you’re looking to secure a bond, ooba Home Loans offers a range of tools that can make the home buying process easier. Start with their Bond Calculator, then use the ooba Home Loans Bond Indicator to determine what you can afford. Finally, when you’re ready, you can apply for a home loan.
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