Does paying your monthly bond instalment in two halves – one at the start of the month and one in the middle – contribute to a shorter bond repayment term and a saving on interest?
No it doesn’t, says Shaun Rademeyer, CEO of mortgage originator BetterLife Home Loans. “There is actually no advantage in breaking up your home loan repayment like this unless you actually deposit half a repayment every two weeks of the year – which would of course then equate to 26 half-payments a year – or 13 full monthly payments instead of 12.”
Rademeyer, however, says there is an easier way to cut the term significantly and save on interest.
“Just save the money until a full extra month’s payment can be made and then deposit it once, with the instruction that it is to be used to reduce the capital portion of the loan,” he says. “What is more, you will actually save more interest by doing this instead of paying off a little extra each month. For example, on a R1m home loan at the current prime rate of 10.25%, one additional month’s repayment of R9,800 made annually will cut 50 months off the 20-year repayment term and save you about R341,000 in interest.
“A monthly additional payment of one-twelfth of this (or R817) will cut the repayment term by 48 months and generate interest savings of about R323,000.”
Steven Barker, head of Home Loans at Standard Bank, says that homeowners who still decide to put a little extra money into their bonds each month will also save a lot of money after the 20-year term is up.
“For example, say you take a loan for R750,000 at an interest rate of 10% per annum over 240 months (20 years), the assumption is the interest rate remains at 10% for the entire loan term,” says Barker. “By making additional payments to your monthly minimum instalment of just R500 can bring down your loan term by 40 months (more than three years).”
To be able to do this, though, requires a reassessment of homeowners’ debt situation.
“It is advisable to reduce, or completely cut any short-term debt and retail accounts that are a drain on your budget,” he says. “It’s the small things that add up: not purchasing that daily cup of coffee at R15 over 50 weeks a year, could mean an additional R3,750 freed up to put into your bond. Similarly, cutting out that R500 a month spend on retail accounts that are not necessities means an additional R6,000 saving a year. These two simple savings tips could mean around R9,750 extra per year freed up to be paid into your bond, which leads to months shaved off your bond term.”
Rademeyer says those who are lucky enough to receive a 13th cheque each year are always advised to put as much of it as possible towards an additional bond repayment.
“If they are able to also pay in part of their bonus at the end of the year, or any money they receive as gifts or even tax refunds, they will be able to get the loan paid off even faster,” he says.