How to reduce your home loan

propertyMost homeowners have a bond on their property which generally forms a significant part of their monthly expenses and therefore should receive ongoing attention and determination to reduce the outstanding balance as much as possible.

Many people, once they get a bond and are told what the monthly repayment is, never consider trying to reduce the payment again. It becomes just another monthly expense. Banks offer different interest rates for different clients, and it is up to you to negotiate the best rate possible from your bank.

Craig Hutchison, CEO of Engel & Völkers Southern Africa, says all the banks have similar structures and policies regarding your bond, and although one you may be tempted to move from one bank to another with the promise of a lower monthly payment, do your homework before making this important decision.

He says it can and will make a huge difference in the total amount that you save in the long term and is undoubtedly one of the best investments you could make.

He says bond holders need to fully understand the implications of the move between two banks, and be aware that it may in fact cost more at the end of the day. There are certain penalties and cancellation costs that may be applicable as well as costs in registering the new bond at a different bank, so be sure to establish exactly what these costs would be.

Sandy Reddy, Head of EV Financial Services, says the banks will not consider granting you a lower interest rate if you have any bad debt record and this will negatively affect you financially. “In fact, you may not even be granted a home loan at all. Watch and manage your spending habits and ensure that your credit track record is sound, and always pay your current accounts on time every month.”

However, your goal should be to try and pay off your bond as soon as possible, as your home is probably your biggest investment. If you can achieve a lower interest rate you will have more funds available to pay into your bond each month. Do not be tempted to use these extra rands from the lower interest to buy unnecessary household gadgets or electronic devices. Every rand will make a considerable difference in the full amount you eventually pay back to the bank on your home loan.

By increasing your bond repayment by a few hundred rand each month you could save substantial interest because you’ll be paying your bond off much quicker. Due to our economic climate, often paying this additional amount is not possible or bond owners do not fully understand the positive financial implications it would have in the long term. If you are not sure of the true value of this additional payment, you should consult with a financial planner who will give you sound advice.

Should you be fortunate enough to experience a windfall of extra cash, whether from inheritance, SARS refund, sale of a car, etc, you should seriously consider transferring this money onto your bond. As the banks calculate interest on a home loan based on the daily outstanding balance, you will noticeably benefit in the reduction on your bond with any payment made into this loan account.

Another option is to transfer your monthly income into this home loan account and withdraw it as you need it, but first check the policies and restrictions of your home loan account’s access limitations. Generally, an access bond allows you to access your loan account when needed. Any additional payment will reduce the outstanding balance as interest is calculated on a daily basis. This lower daily outstanding balance will reflect directly into repaying your mortgage loan quicker than the full term. Look after the pennies and the pounds will look after themselves.

Increase your bond repayment

When you borrow money to buy a home, you are in effect taking out two loans. The first loan is to repay the capital amount (known as the principal sum) and the second loan is to repay the interest charged over the period of the loan. The majority of the money you repay in the first years of having a home loan goes towards paying back this interest, which will only marginally reduce the principal sum.

Use your bond as an interest-bearing savings account

By depositing your savings into your bond, you are in effect receiving the interest rate that the bank charges you on your loan as positive interest on the money you invest. For example, if you have a bond for R1 million, and you deposit an extra R100 000 into your home loan, you are now no longer being charged interest on R1 million, but rather on R900 000. The money you save in interest over the time that you keep the R100 000 in your home loan is the positive interest you are in effect receiving on the money you’ve deposited.

When you attain your budgetary savings goals, you will enjoy a sense of achievement and accomplishment.

Source: Property24

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