How to make your home loan work for you
by CarienDaffue 18/07/2013 01:55:42 PM 0 Comments
Buying a property is one of the biggest steps you can take in your life. A home is a serious investment and, like all investments, it needs to be managed properly in order to ensure that you get the best possible return. Unfortunately very few of us give our home loan a second thought, apart from the monthly instalment. But actually there are a number of important steps that a homeowner can take to ensure that their hard-earned money is being put to good use.
The first of these are to increase your bond repayment. The reality is that when you borrow money to purchase a home you are in effect taking out two loans. The first of these loans is to repay the capital amount and the second loan is to repay the interest charged over the period of the loan. When you think of it, it is logical that the majority of the money you repay in the first years goes towards paying back this interest, which will only marginally reduce the principal sum.
In South Africa, interest on your mortgage is calculated on a daily rate. So this means that the amount you owe the bank increases every day. Because of the nature of compound interest, regular additional repayments made at the beginning of your loan term will have a much greater effect on the cost of your bond than if you start paying extra cash into your bond account five or ten years down the line. But obviously it is never too late to start and you can still make a considerable saving by paying additional money into your bond. By adding a bit of money to your monthly instalments, you’ll reduce the term of your bond, which in turn means that you safe money in the long run. The end result is that you will have paid less money in interest over the term of the loan.
There are a number of easy ways that you can put additional money into your bond without really feeling the difference in your pocket.
What about putting the additional income you receive from your annual salary increase into
your home loan. Another idea is to contact your lender when interest rates decrease and ask them to maintain the instalment that you were paying prior to the drop on lending rates. You can even put a portion of your annual bonus into your bond. Every little bit helps. Making a prepayment when the loan registers is particularly helpful, as you will reduce the capital amount immediately, significantly reducing the total interest payable over the term of the loan.
Look at this example: if you buy a house for the price of R1 000 000 your monthly payment will be R9 570. If you pay an extra R430 into your bond every month making your payment R10 000 you will save 2 and a half years on your repayments. This amounts to a saving of over R 287 100 and if you deduct the extra money you have paid into the account you still end up with a saving of R196 800.
Use your bond as an interest - bearing savings account. Banks are in business to make profit so it makes sense that they charge a higher interest rate to people borrowing money from them than they do to investors who deposit funds with them. For example you might be receiving 2% interest on a positive balance for money in your savings account, but are probably being charged a much higher rate for the money you’ve borrowed to pay off your home loan.
By depositing your savings into your bond, you are in effect receiving the interest rate that the bank charges you on your loan as positive interest on the money you invest. For example, if you have a bond for R1 million, and you deposit an extra R100 000 into your home loan, you are now no longer being charged interest on R1 million, but rather on R900 000. The money you save in interest over the time that you keep the R100 000 in your home loan is the positive interest you are in effect receiving on the money you’ve deposited. Plus you can withdraw this cash when you need it without being penalised.
So don’t just let the opportunity go by. Manage your bond and manage it to your advantage. Be money wise.