Sick of making home loan payments? They can be a huge drain on your budget, especially if your bond is eating up a large part of your income. Not to mention all the interest you’re paying on the loan over 20 years.
A home loan is one of the cheapest ways to borrow money for most of us. But it can still rack up some serious interest over a typical 20-year loan term.
Want to say goodbye to your bond before the 20 years?
Here is how some people pay off their home loan early. And shave thousands off their interest payments.
Paying extra capital into your home loan
A home loan is a major financial burden and reducing it can have immediate benefits. You need to understand how home loans and repayments are structured.
Say you have a home loan of R1.8 million. The usual repayment term is 20 years (240 months) and let’s assume an interest rate of 10% a year. This means you will have 240 payments of R17,439.39 if the interest rate remains level over the term.
But, what most of us fail to realise is that most of the repayments go towards interest than towards capital. This means that a very large chunk of your repayment goes to interest and a small amount to capital. This means you’re paying the bank their interest before you repay the capital.
Take the loan of R1.8 million, the interest is a whooping R2,368,893.51!
Any extra payments you make are immediately paid towards the capital amount. Meaning you can save vast amounts of interest over the term. It’s in your interest to pay any extra money into your bond. Let’s look at an example of how this works:
If you pay an extra R2,560.61 a month into the bond, making your total repayment to R20,000 a month. You will finish paying the bond in 113 payments, paying a total of R2,603,705.47. Compare this to the R4,185,453.51 you will pay in total if you stick to the original repayment. You see you can save a massive R1,581,748.04! Home Loan Calculator
Some disadvantages of paying off your home loan early
- You won’t be able to access debt at a low interest rate. For renovating, personal cash flow or buying a new car
- Home loans offer the cheapest debt available. So you could save more money by first paying off other debt like your credit cards or car finance
- If you’re renting out the property, you could save on tax because interest paid on your bond is tax deductible.
Some advantages of paying off your home loan early
- You cannot fall into the trap of using the home loan facility to finance other purchases.
- You can use the money you save on interest on something else.
- If you are nearing retirement and planning to remain in your home, it will bring you comfort to know it’s fully paid.
- If you’re self-employed, having a paid-off home lessens the risk of defaulting on your bond.
- You will have more disposable income available. Which you can put towards your retirement or other savings.
Remember, to notify your bank 90 days in advance that you’re planning to close your home loan account. If you don’t you will be liable for bond cancellation fees and may pay extra interest.