Investors can reduce the length of the term of the loan, and thereby the total that they pay for their investment property, saving masses of interest, with a few simple but highly intelligent and effective decisions.
People tend to take their monthly bond payments into consideration more readily than the total amount that will be paid for the full loan. Albert Einstein said, “Compound interest is the eighth wonder of the world. He who understands it earns it, while he who doesn’t pays it.” Just as compound interest is an enormous blessing to those who are saving, it can become a massive burden to those having to pay it. It is worth using an online home loan calculator to see the effect compound interest has on the overall final rand value paid for the money investors borrow to buy their property.
Of course there are always ways to reduce the impact of the interest charged on your loan, and a savvy investor leverages these to reduce their debt to maximise the possible return on investment.
1. Put down the largest deposit possible
Most investors factor in a 10% deposit to secure a property, but if you put down more than 10% the bank will view this in a favourable light, and a larger deposit will reduce your total repayments as your loan amount is reduced.
2. Secure a lower interest rate
A bond originator is able to negotiate with multiple banks during the home loan application process and secure the lowest possible interest rate. As mentioned above, compound interest can have a profound impact on the final amount an investor will end up paying over the full term of the loan. Even a small reduction in the percentage can have a large influence on the numbers. For example, if you take out a loan of a million rand, over 20 years at 10.75% interest:
- Monthly repayment: R 10 152
- Total amount repayable: R 2 436 549
But if you decrease your interest to 10.25%:
- Monthly repayments R 9 816
- Total amount repayable R 2 355 944
- This small reduction saves the investor nearly R80 605 over the term of the loan.
3. Pay a bit extra than the minimum required each month
This is the most effective way to reduce the term and cost of your home loan. The more you pay in, the more you save. Using the figures above of a R1 000 000 loan over 20 years at 10.25% interest, if an investor increases the monthly repayment by only R500 per month, to being the repayment amount to R10 316:
- Original loan amount: R2 355 944
- New loan amount: R2 134 989
- Loan reduced by R220 955
The term of the loan will also be brought down to just over 17 years, meaning you will own the property outright in a shorter time period.
4. Allocate any windfalls towards paying off the home loan
To help settle this debt as efficiently as possible it’s a very good idea to allocate any extra cash investors may receive that was not planned (such as extra commission, a bonus at work or a SARS refund) to the bond payment. A lump sum payment like this reduces the interest paid towards the debt, as well as the term of the loan, just like the increased monthly payments do.
5. Investors can be cunning about the timing of the payments
Because interest is calculated daily savvy investors could reduce their total repayment amount by making their bond payments earlier than the regular monthly payment date. Although it may not sound like much, each day of interest saved positively impacts the overall repayments.
Using these simple techniques are highly cost-effective in the long run without over-stretching the investor financially in the short term, and yet will save hundreds of thousands of rand – enough to use as the deposit on the next few investment properties!