Slash interest and time in debt
Buying a property is the biggest investment people make. Similarly, if you utilise a loan from a bank to finance the transaction, it will be the biggest debt you will take on. This debt can stay with you for up to 30 years, depending on how long the bank will grant you to pay back the home loan.
The interest burden
The reason why a home loan becomes such an extensive debt burden is the payable interest. Consider these two scenarios, in which the impact of a 2% higher interest rate is highlighted.
While a 2% increase in the interest rate on a R500 000 home loan only results in a R670 increase in the monthly repayment, it adds a staggering R161 158 of additional interest payable over the 20-year period. If, instead of paying off a higher interest rate, this additional R600 a month is paid into the bond as an extra monthly payment on a lower interest rate loan, it makes an enormous difference to the interest payable and the term of the loan. If you want to reduce the debt burden of a home loan significantly, ensure you get the best interest rate when negotiating the loan. Save up a deposit and keep your credit profile strong.
The term of the loan has a huge impact on the total repayment. Compare the two scenarios below:
Over 20 years, the total amount in interest payable is R618 557. If you stretch your R500 000 bond term over a 30 year period, with the same prime interest rate, you will pay R1 013 537 in interest – more than double the capital of R500 000 that was initially borrowed! It makes sense to keep the repayment term as short as possible.
Extra monthly payments
Paying extra money monthly into your bond reduces the bond term – and if you shorten your bond term, you save thousands of Rands in interest. Consider these two scenarios, comparing the effect of paying the minimum monthly installment vs paying an additional R500 per month.
If you pay R500 extra per month into your bond, you will shorten the term by four and half years and save R163 506 in interest. Using R500 more wisely each month can significantly improve your financial situation. And if you increase the extra amount from R500 to R750 per month, you can save a whopping R214 081 in interest and pay off your home loan in just 14 years.
If you receive a bonus or a cash windfall, consider paying that into your bond account. Consider the impact illustrated below:
On a bond of R500 000, paid back over 20 years at an interest rate of 9.5%, an extra once-off payment of R6 000 will slash your total bond repayments by R32 382 and shave eight months off your bond repayment term. It translates into a 539% return on your R6 000 investment over 20 years – certainly a smart way to invest R6 000!
With proper planning, you can slash the interest burden of a home loan by thousands of Rands and reduce the time period you are indebted to the bank. Start by getting the best interest rate and the shortest loan term possible, and then reduce both the term and the interest payable by making any extra monthly payment and investing any bonus or cash windfall into the biggest investment you have made.
http://www.reimag.co.za/?p=1772 – Reimag
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