One New Year’s resolution every homeowner with a mortgage bond should seriously consider is to increase their repayments by just a small amount each month.
Many people start the year making plans to get better control of their finances and save money for their retirement or other projects like education for their children. The experts agree, though, that one of the best investments you can make is in your existing bond.
The reason for this is that the amount of interest you save on your home loan will outstrip the returns you might make by investing in some high-interest/high-risk investment vehicles.
Compounding
If you pay only the minimum amount each month over the 20-year course of the loan, your property will end up costing you more than double the original purchase price.
This is because of the way compound interest works. Compound interest is the addition of interest to the principal sum of a loan - in other words, interest on the principal plus interest. It is the result of adding interest to the loaned capital so that in the next period, the bank then earns interest on the principal sum plus the previously accumulated interest.
The principal also works in reverse to your benefit. If you pay just 10% more than the minimum each month, you will pay off the loan in just over 15 years instead of 20. You will also pay about 50% less in interest, which means that on a R1-million bond, you will have about R500 000 in your pocket, which you would otherwise have paid in interest. This represents an excellent - and tax-free - return on your total additional investment in your home loan.
Building wealth
Over the term of the bond, the value of your property will increase along with your equity. This will provide a solid foundation on which to build wealth and meet your family’s future needs. It is also worth keeping in mind that an investment in property is relatively risk-free. This is a very valid concern at a time when the value of even blue-chip shares that might seem like a certainty can be wiped out within hours.
Writer : Sarah-Jane Meyer
