At the current prime rate of 10.5% a R1m home, bought with a 90% loan, will end up costing R2,257m in total, due to the R1,275m in interest over a 20-year repayment term.
Shaun Rademeyer, CEO of BetterLife Home Loans, says that halving the repayment term could save you up to R700,000 in interest on this R1m home. “Paying off this home loan over 10 years would mean that the buyer only pays R554,000 in interest, thereby substantially lowering the cost of the property.”
All this takes is paying an additional R3,200 a month off the capital portion of the home loan. So essentially the additional payment, totalling R384,000 over 10 years, will save the buyer R700,000 in interest. A good investment even when not taking into account the fact that you will own a home that is fully paid for after the 10 years.
When there’s almost no wiggle room
While R3,200 is the repayment on a second car for some families, making it easy to reshuffle and pay off a bond 10 years faster, it may be too far a stretch for families already on a tight budget.
The good news is that even if a buyer can only afford to pay an additional R300 off their home loan each month their repayment term will decrease to 18 years, saving them R148,000 in interest.
“That represents a whopping 128% return on the additional R64 800 you would be paying into the home loan account,” explains Rademeyer. “Which in investment terms is a guaranteed return of significantly more than you could hope to earn at this stage by putting that money in savings or a money market account – or investing it in the stock exchange.”
An added benefit of investing extra capital into your bond is the security you are creating for your family. Building equity into your bond creates a strong financial foundation on which to base your plans for meeting your family’s future needs.
The bottom line is if you are not willing to change your spending patterns slightly there will never be room in the budget for additional payments, be it R300 or R3,200. It will require a mind shift and some sacrifice, but the benefits cannot be contested.