Have you ever considered how much money you could save yourself by paying off your bond early?
While a bond is one of the cheapest ways to borrow money for most of us, it can still rack up some serious interest over a typical 20 year loan term.
| Bond Amount | Interest Rate | Term | Monthly Repayment | Total Repayment | Total Interest |
| R1 000 000 | 10.25% | 20 Years | R9 816 | R2 356 181 | R1 356 181 |
| R900 000 | 10.25% | 20 Years | R8 834 | R2 120 782 | R1 220 782 |
| R500 000 | 10.25% | 20 Years | R4 908 | R1 178 090 | R678 090 |
In fact, paid off at the minimum rate over the maximum duration, you’ll usually end up paying more than 100% of the original value of the loan in interest.
The good news is that banks aren’t allowed to lock you into that 20 year loan term – it’s a maximum length, not a minimum, and there’s nothing to stop you paying off your loan faster in order to decrease the amount of interest you have to pay.
Put a little extra in every month
The first and most obvious way to reduce your loan term is to put in extra money every month. You’d be surprised at what a big difference just a couple of hundred rand a month can make.
For example, on a R1 000 000 bond at a 10.25% interest rate, monthly repayments are R9 816.
Paying an additional R500 and raising your repayments to R10 316 per month would save you R 221 188 in total, and knock about three years off your loan term.
That’s a huge return on a very small investment – just imagine what your Christmas bonus could do.
Tip: Calculate how much difference a few extra Rands will make on your bond repayments here
Use your bond as your savings account
Because of the dramatic savings a very small amount of money can make in your loan account, it is strongly recommended that you put all available funds into your bond as a matter of course.
These days most bonds have an access or flexibond facility that allows you to withdraw any equity you have in the bond at any point.
That means whatever extra money you’ve put in, above and beyond your minimum payments, is still available to you in an emergency, just as it would be in a normal savings account – only in your bond it’s saving you thousands of Rands worth of interest in the meanwhile.
Tip: Struggling to find the extra cash to put into your bond? Work on paying off your short-term debt as quickly as possible as the interest rates are significantly higher than longer-term debt.
Another benefit of doing this is the fact that those savings are tax-free.
Any interest you earn on a savings or investment account is subject to tax, whereas savings on your bond can’t be taxed at all.
Money you invest elsewhere is also unlikely to earn more interest than that being charged on your loan, which means it’s almost always better to put that money straight into your bond – it’ll save you far more there than it could earn somewhere else.
Make your payments earlier in the month
Of course, not all of us have spare cash lying around at the end of the month, so putting extra money into our bonds isn’t always an option. Luckily, there is another simple tip to save thousands without spending anything extra at all.
Interest on mortgages is calculated daily, so the earlier in the month you pay, the less interest you accumulate.
While moving your debit order a couple of weeks earlier in the month won’t make any visible difference over the short term, it can cut over a year off of your loan in the long run and save you thousands of Rands.
Put pay increases and bonuses into your bond
While pay increases and year-end bonuses are fantastic, generally they only offer short-term financial relief or the opportunity to splurge on a new TV or a family holiday.
Consider adding a portion, if not all, of your pay increase or bonus to your bond. The long term effects will be significant.
Tip: Work out how much difference your annual bonus will make on your bond repayments here
To find out more about financing your property purchase, or minimising the costs of your bond, contact Rawson Finance here or see how much difference our tips will make to you by using our bond repayment calculator here.
