Here’s how you can chip away at your bond with lump-sum deposits.
It has become common knowledge among homeowners that paying a little extra off your home loan every month can dramatically reduce the term of the loan and can also result in big savings on interest. However, according to Shaun Rademeyer, CEO of BetterLife Home Loans, SA’s biggest mortgage originator, people should not be misled into believing that paying their monthly bond instalment in two halves - one at the start of the month and one in the middle – will have the same effect. “There is actually no advantage to breaking up your home loan repayment like this, unless you actually deposit half a repayment every two weeks – which would of course then equate to 26 half-payments a year – or 13 full monthly payments instead of 12”, he says.
The best way to pay an additional monthly instalment
If you’re going to pay an additional monthly instalment each year, there is a much easier way to do so. “Just save the money until a full extra months’ 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”, says Rademeyer. “What’s 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 R9800 made annually will cut 50 months off the 20-year repayment term and save you about R341 000 in interest”, he explains. “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.”
Rademeyer says this is why 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.
Even smaller additional amounts can help
“However, it is easier for most people to pay off a smaller additional amount each month, and they should certainly not stop doing this, as it can still make a significant difference to the total cost of their property over 20 years”, continues Rademeyer. “If they can manage just R400 a month, for example, they will cut 21 months off the repayment term and save R184 000 worth of interest”, he says. “And if they are then also able to pay in a 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.”
Making as many lump-sum deposits as possible over the years, can really help to reduce the overall bond amount, meaning that you’re likely to pay off your home loan faster.
