Your home loan is probably the biggest expense on your personal budget. This expense eats into your cash flow – and on a 20-year loan, isn’t going anywhere soon.
There are ways to pay off your home loan faster. I also want to add a caveat: you are going to have to pay off the full amount – but there are ways to save on interest and fees. This article will discuss how to pay more money into your bond faster, negotiate on interest rates and pay less interest.
To start, we need to understand how home loans work. This will help us to pay it off faster,
Understanding home loans and home loan structures
A home loan and a mortgage are often used interchangeably, but there are two distinct types of loans in South Africa. Interest on home loans is calculated daily. This means if you deposit more money into that account, you will pay less interest. On the other hand, the ‘mortgage… thing’ precalculates all interest in advance and sets the total amount repayable from day one. For this ‘thing’, you need to negotiate in advance when repaying sooner.
The big 4 banks in South Africa tend to have the standard home loan which is either an access bond (also referred to as a Flexi bond) or a fixed bond. If your interest rates are fixed, you will not be able to pay in extra for that term.
Should I have a fixed or variable interest rate?
When requesting a fixed interest rate, the bank needs to preempt the risks of interest rate hikes. For this reason, you will find that banks could charge up to 3% more than your quoted interest rate to fix it for a term of 2-3 years. This is often done early in the repayment term when you will be paying the most interest. If you’re a stability freak and need to make sure you know how much you will repay, then going fixed is best. If you want to pay off your bond as fast as possible, then a variable rate would be recommended.
Always make sure you have an emergency fund in case interest rates go up, your property needs desperate maintenance or you run out of coffee!
Paying more money into your bond
A Flexi bond, however, allows you to deposit and withdraw any extra cash. Interest is calculated daily. Therefore, if you have extra cash in your bond, the interest payable is less. To illustrate the effect of compound interest and paying off a small amount, let’s look at this simple calculation for paying in an extra R 50 on a bond every month.
Calculation on paying off more than the normal bond repayment amount
On a R 400 000 home loan at 9% interest, the bond repayment will be R 3 599.
The total repayable, including interest will be R 863 737
If we would pay an additional R 50 per month from day one, we will be paying off the property in 19.26 years, not 20. You will be paying back R 20,478 less.
Compound interest on this small amount makes a huge difference – and can be a lifesaver!
How to pay more money into your bond
I know this sounds silly – but there are ways to pay a bit more into your home loan every month. Here are some ways:
- Set up a recurring payment that deposits the money just when your salary hits your bank account
- See how much you have left at the end of the month and pay over any extra cash
- Another NOT RECOMMENDED strategy is using your home loan as your primary bank account. Deposit your entire salary into your home loan, and withdraw the money as needed. As interest is calculated daily, it will reduce the interest substantially. Note if you don’t have enough money in your account and your debit orders bounce, you’ll be in big trouble!
Pay a deposit
One of the obvious things are that you can pay a deposit, meaning you will have less money that you need to pay interest on. If you do pay a deposit, you are also able to negotiate a better interest rate, as the bank’s risk is lower.
Negotiate interest rates to pay your home loan off faster
Interest rate negotiation is key for paying your home loan off quicker. Lower interest rates mean less compound interest and lower your monthly repayment. Here are some tips:
- Send your bank an interest rate review request every year or two. The worst they can say is no, but they will often negotiate the rate
- Offer to consolidate the extra payments into your home loan to lower interest rates
I have also seen cases where it was cheaper for someone to move their bond to another bank at a lower interest rate – and negotiated that the bank pays all the fees for moving.
Can I use the loan term to pay it off faster?
In the most obvious sense, if your loan term is reduced from 20 to 10 years, you will be forced to pay it off in a shorter time. However, if you have a 30 year term, your repayment amount will be less, but interest will be more. If you’re having cash flow issues such as a variable income, then having a smaller monthly installment might be a good idea. If you have any extra cash coming in from dividends, commission, or freelance clients, then you can pop that money into your bond.
Paying off your bond quicker means you need to put more money into your bond. As interest on Flexi bonds are calculated daily, extra money in your bond over two or three days makes a difference.
Interest rates should be negotiated regularly – the worst that can happen is the bank can say no!
Be careful to change the repayment term – it could either ruin your cash flow or make you lax repaying more money into your bond.