PAYING OFF YOUR BOND FASTER

PAYING OFF YOUR BOND FASTER

Buying your own property is most likely the biggest investment you will ever make. Similarly, if you utilise a loan from a bank to finance the transaction, it will most likely be the biggest debt of your life. This debt could stay with you for a period of between 20 to 30 years as this is how long the bank will grant you to pay back your home loan.

If you pay back a R500 000 home loan over 20 years, based on the current prime rate of lending, this loan will cost you an additional R 618 557.00 in interest to pay back. Your total loan repayment will therefore be R1 118 557.00 over the 20 year period. If you have a bond of R2 million rand, it will cost you an additional R2 474 229.00 in interest. If you stretch your R500 000 bond repayment over a 30 year repayment, with the same prime interest rate, you will end up paying R 1 013 537.00 in interest – more than double the capital initially borrowed.

It thus appears that it is wise to pay back your loan in as short a period as possible. The question is why wait the full 20 years to pay back your bond?

Before we start to look at a shorter period to repay your home loan, let us look at what you need to qualify for a home loan. There are three basic requirements a bank will consider when granting a home loan. Remember that the amount of the home loan is the first thing that you may require, as this will determine whether you will be granted a 100% loan to pay for the property that your bought, or only 80% . If you only qualify for an 80% home loan, then you will need to contribute the balance of the 20% of your own money to make up the full purchase price. The average deposit required by the banks at the moment appears to be 15% of the purchase price.

The first requirement is your “affordability”. Prior to the implementation of the National Credit Act (NCA) in 2007, the lending institutions applied the “30% of income rule”. It meant that if you wanted to raise a home loan of R500 000, you had to earn at least 3 times the amount needed to be paid back every month. When the NCA was introduced, the lending criteria was supposed to be calculated only on the borrower’s actual affordability, that is income less expenses, but we see that notwithstanding the directive of the NCA, the “30% of income” rule is still applied to determine the affordability of a borrower.

The second criteria of banks are the “credit profile” of a borrower and a home buyer often overlooks or neglects this important factor when the home loan application is submitted. The credit profile of a client will determine the risk that a bank is willing to take to lend out money to a client. For obvious reasons, the lower your risk to a bank, the lower your interest rate may be and the reverse is also true – the higher your risk, the higher your interest rate will be. If the bank is of the opinion that your debt exposure, your payment history of past accounts or late or no payment of accounts will be a risk to them lending you money, they may decide to add 2 or 3 or sometimes up to 4% interest points to the base home loan rate, which is currently at 9.5 %. You may think that your first priority is just to get a home loan, regardless of the interest rate being only one or two percent above prime, but if you consider that you can end up paying this higher interest rate over 20 years, you can end up losing thousands of rands with an inflated interest rate.

The best advice is to get a copy of your credit profile before you apply for a home loan and investigate all the entries against your credit profile. Investigate how many enquiries were made against your own name over the past 2 years, as excessive enquiries for debt shows that you may be shopping around for funding, which means you may rely on debt to fund your lifestyle, which again reduces your credit score. One example of this was a teacher who applied to buy five different properties in one year for a home loan, once a home loan was declined, she started looking for another property a few months later. Each application was unsuccessful. With each application the mortgage originator submitted her home loan application to all four banks and each time each bank declined her home loan application. Nobody ever assisted her in investigating why the loan was declined and as such, she re-applied a few months later to buy a property from another seller. After one year, she had 5 x 4 credit application enquiries on her credit profile. The 6th time that she applied for her home loan it was approved as it came to light that the previous 5 applications were declined due to the fact that during such applications she was not permanently employed with the Department of Education. Once she had her permanent employment confirmed, the loan was granted. The problem however was that due to all the past credit enquiries against her name, the bank regarded her as a high risk and added 4 interest points to the prime lending rate. The result was that the higher interest rate made the repayment of the home loan too high and she had to decline the home loan.

A better credit profile may assist you to negotiate a lower interest rate. If a home loan of R500 000 is paid off over 20 years, at an interest rate of 9.5%, the total capital and interest repayment will be R1 118 557.00 and if the same amount is paid back over 20 years with an interest rate of 2 % higher, at 11.5 %, then the capital and interest repayment will be R 1 279 715.00 – which is a staggering R161 158.00 extra paid over the 20 year period. It is thus worth your efforts in making sure that your credit profile is strong and healthy before you apply for a home loan, as you can use the extra money that you would have paid, to pay that extra each month into your bond in order to pay off your bond faster.

If you have a deposit available when you buy your own home, this deposit will lower the amount which the bank must lend to you and again this reduces the risk to the bank. The lower the risk to the bank, the lower your interest rate ought to be. It thus makes good sense to save towards a deposit before you go out to buy your property, as it improves your negotiation power and can reduce your risk to the bank and your subsequent interest rate.

You have now realized the advantage to negotiate the best possible interest rate and if your affordability (meaning your cash flow) allows it, start saving even more and pay off your bond faster by paying in either an extra amount into your bond every month, or do occasional once- off payments into your bond.

INCREASE YOUR PAYMENT PER MONTH AND SAVE

When you buy a car on credit, the repayments are usually structured over a 60 month (5 year) repayment period. A car buyer will thus easily repay the credit for a R300 000 car bought over 5 years, but will take 20 years to pay off a home loan of R500 000.00. Why not apply a similar reduced repayment structure for a home loan?

Paying extra money into your bond every month reduces the bond term – and if you shorten your bond term, you again save thousands of rands over the bond term. An example as follows: If you have a bond of R500 000 and you pay it off over 20 years – at the current prime rate of 9.5 %, it will cost you in total R1 118 557.00 over the 20 years to pay off your bond. If you however pay R500.00 extra into your bond every month, you will pay off your bond in less than 4, 6 years and save +/- R163 500.00 – just think of how easily you spend R500.00 per month on unnecessary expenses.

Extra Payment of R500.00 per month on a bond of R500 000.00

Loan Amount

Interest Rate

Loan Term

Start Month of Loan

Start Year of Loan

Additional monthly payment

Start month of increased payment

Start year of increased payment

________________________________________

Result of calculation

Increased Instalments on R500,000.00

Original payment

Pay-off time 20 years

Monthly payment 4,660.66

Total capital paid 500,000.00

Total interest paid 618,557.43

Total amount paid R1,118,557.43

Increased instalments

Pay-off time 15 years 6 months

Monthly payment 5,160.66

Total capital paid 500,000.00

Total interest paid 455,051.17

Total amount paid R955,051.17

Lump Savings

Time saved 4 years 6 months

Interest saved R163,506.25

Pay even more – if you can increase the extra amount to R750 per month, you can save a whopping R 214 081.00 and pay off your home loan in only 14 years.

A ONCE OFF PAYMENT

If you receive a bonus or a cash windfall and wonder what to do with the money – consider to pay that into your bond account.

On a bond of R500 000, paid back over 20 years, with the interest rate of 9.5 %, you can save R32 382.00 on your total bond repayments if an extra once-off payment of R6 000.00 is made into the bond account and you will save 8 months off your bond repayment term of 20 years.

Additional once-off payment R6 000 on a bond of R500 000.00

Loan Amount

Interest Rate

Loan Term

Start Month of Loan

Start Year of Loan

Once of lump amount

Month in which payment is made

Year in which payment is made

________________________________________Lump instalments Costs on R500,000.00

Original payment

Pay-off time 20 years

Monthly payment 4,660.66

Total capital paid 500,000.00

Total interest paid 618,557.43

Total amount paid R1,118,557.43

Lump instalments

Pay-off time 19 years 4 months

Monthly payment 4,660.66

Total capital paid 500,000.00

Total interest paid 586,174.88

Total amount paid R1,086,174.88

Lump Savings

Time saved 0 years 8 months

Interest saved R32,382.55

DEBT CONSOLIDATION

Consolidating your debt may be a solution to get rid of expensive debt. The interest rate that applies to most unsecured debt is often double or triple the home loan interest rate. Compared to the current prime home loan rate of 9.5 % per year, unsecured loans often have interest rates between 20% – 60 % per year. If you can “swop” your expensive loans with less expensive loans, you can save thousands of rands.

If you have a property, you can use the security of a property with enough equity as collateral to raise a further loan to pay off expensive debt. The same affordability and credit profile criteria will apply to raise the further loan.

What many overlook is that you simply extend the term of your debt repayment with the consolidation of your loan as few will have the discipline to pay the extra money saved with the lower interest rate to pay those savings into the bond account. This may cost you thousands of rands more – as you will now be paying of the added debt over the entire bond period.

However, if you use the savings in expensive interest and you have the discipline to pay the extra savings into your bond account, you can get rid of expensive debt and pay off your bond super-fast.

Consider the following scenario:

You take up a home loan of R1 million rand in 2014 and you also buy a car in the same period of which costs you R300 000.00.

Home loan of R1 million x 20 years x 9.5 %

Loan Amount

Interest Rate

Loan Term

________________________________________Instalments Costs on R1,000,000.00

Pay-off time 20 years

Monthly payment 9,321.31

Total capital paid 1,000,000.00

Total interest paid 1,237,114.85

Total amount paid R2,237,114.85

To pay back the home loan over 20 years will cost you R9 321.00 per month and to pay back the car over 5 years will cost you R 6 374.00 per month – calculated at 10 % interest x 5 years.

Car repayment R300 000.00 x 10 % x 5 years repayment

Loan Amount

Interest Rate

Loan Term

________________________________________Instalments Costs on R300,000.00

Pay-off time 5 years

Monthly payment 6,374.11

Total capital paid 300,000.00

Total interest paid 82,446.80

Total amount paid R382,446.80

If you now increase your bond with R300 000.00 to R1 300 000.00 to buy the car for cash and you pay the R 6 374.00 car instalment into your bond account for the duration of the home loan (as you are used to such payments anyway by then) – you can save thousands and trim your bond repayment term with almost 12 years.

See the calculation below:

Bond calculation – R1 million bond + additional payment of R 6 374.00 per month

Loan Amount

Interest Rate

Loan Term

Start Month of Loan

Start Year of Loan

Additional monthly payment

Start month of increased payment

Start year of increased payment

________________________________________Result of calculation

Increased Instalments on R1,300,000.00

Original payment

Pay-off time 20 years

Monthly payment 12,117.71

Total capital paid 1,300,000.00

Total interest paid 1,608,249.31

Total amount paid R2,908,249.31

Increased instalments

Pay-off time 8 years 8 months

Monthly payment 18,491.71

Total capital paid 1,300,000.00

Total interest paid 606,945.81

Total amount paid R1,906,945.81

Lump Savings

Time saved 11 years 4 months

Interest saved R1,001,303.49

Summary – You can save thousands of rands on your home loan with proper planning.

-End-

Meyer de Waal

Oosthuizen and Co Meyer de Waal

My Budget Fitness

021 461 0065

meyer@oostco.co.za

www.oostco.co.za www.budgetfitness.co.za

Calculations done with the help of Avid Firelyfly

http://www.avidfirefly.co.za/