Johannesburg - Recently, Perry asked Fin24.com's Money Clinic: "How can I pay off my home bond faster?
"I pay the monthly payment, but do I just put in extra money every month or is there another way?"
Paying more than your normal monthly instalment will save you a huge chunk of interest - and shave years off your home loan term.
On a home loan of R1m, paying an extra R500 more than the normal instalment will take a cool R250 400 off the interest bill, and shorten the loan term by almost three years.
How to do it
If you have some money available now, but aren't certain whether you will have the extra money every month, you can make one-off cash deposits into your bond. Depending on your bank, the first deposit should be free. Some of the banks will levy a charge for further deposits.
If you are relatively certain you can pay more than your current instalment every month, there are usually two options.
You can adjust the monthly payment up to the maximum amount you can afford, which will remain constant for the duration of your home loan. If interest rates rise to above the maximum amount, the additional repayment will fall away and you won't save on interest.
Alternatively, most banks have a more aggressive option whereby you can have your home loan repayment automatically increased every year.
You can decide whether you want an annual percentage increase, a rand amount - or you can opt to ramp up payments so that the home loan is settled in a specific timeframe (like before you retire).
Usually, you can adjust these payments - or opt out of making them - at any time, without penalties.
If you have a lump sum available and want to settle your home loan in one fell swoop, you usually have two options.
You can pay off all the outstanding monies (the principal debt plus interest and charges), but not cancel your bond. This means that you keep access to the loan amount; the relatively low interest on a home loan makes it the cheapest credit around. However, make sure that your bank does not continue to levy insurance premiums each month (you are forced to take out cover for the property when you get a home loan) - a common problem.
Alternatively, you can cancel the bond. You will have to give some notice, usually three months. If you want to cancel it within a shorter timeframe, penalty interest will be charged.
If the loan is cancelled within three years of registration, the bank will also charge a bigger amount to make up for lost interest. The maximum finance charge is fixed according to credit regulations.
A cancellation fee will be charged by the attorney to cancel your bond in the deeds office.
But should you?
Given the huge amount of interest you'll save, paying back your home loan early looks like a no-brainer.
But is it? If you invest the extra R500 over 20 years, you may end up with R334 000 (at a return of 9%) or R460 000 (12%). This is before tax, however.
There is also the inflation consideration. Having long-term debt is a boon in times of high inflation. While the debt remains the same, inflation slowly chips away at what you owe and the instalment becomes less painful.
Your current R10 000 instalment on your home loan will in 10 years' time effectively be the equivalent of R5 600 in today's money - if inflation stays around 6%. However, there is a risk that inflation heads lower and your salary stays stuck.
For many people, particularly in these times of job uncertainty, having the peace of mind of owning their house outright makes the most sense.
And also, once your house is paid off, you have the money to invest the monthly payments elsewhere to build up another nest egg.
However, it doesn't make sense to pay off your home loan debt if you have any other outstanding debts with higher interest rates. Settle more expensive debts first before you tackle your home loan.
- Fin24.com