Rather than risk going further into debt and borrowing money this year, home loan customers should consider using their bond facility as a savings tool. Increasing the repayments on a home loan facility above the minimum requirement will create financial flexibility for homeowners to deal with unexpected financial pitfalls.
“Most home loan customers underestimate the power of their home loan as a sophisticated money management tool. If managed on a disciplined basis it can give you the financial flexibility to weather tough times that life may throw at you,” says Tommy Nel, Head of Credit at FNB Home Loans.
A home loan is relatively cheap because it is a secured loan, which means that the loan is protected by using the home as an asset.
“Consumers often resort to using personal loans and unsecured credit to finance unforeseen expenses or when they start experiencing cash flow pressures,” says Nel. “However, given the risk factors associated with these types of loans, the interest rates on unsecured credit are usually well in excess of interest rates on your bond, which don’t make them the best choice when considering ways to borrow money.”
To use your home loan as an effective savings tool you will need to pre-pay into your account.
“Pre-paying essentially means that you need to put additional cash into your home loan account,” says Nel. “This additional cash works for you by reducing the outstanding balance that you will be charged interest on. If you consistently repay in excess of the minimum, your loan balance reduces much quicker which has two benefits in that you can pay off your loan sooner or, have access to prepayments in future, if you need it.”
On a normal, 20 year home loan, paying the minimum instalments at prime, 9.25% would cost you R9 159 per month.
“Increasing your repayments by 10%, to R10 075 will allow you to pay off your loan in 189 months, four years sooner, as well as give you access to funds of just under R70 000 within 5 years of keeping up these additional payments. Your total interest saving under this option would be 25%,” says Nel.
Obviously, the more paid into your bond, the further the benefits stretch. Increasing bond repayments by 30%, to R11 907, will give you an almost R600 000 saving on total interest paid, and pay off your bond in just under 9 years sooner than the 20 year term.
“Paying in excess of your minimum required repayments, should be consumers’ first port of call when looking for ways to be financially flexible. If you start now, you will very quickly create surplus cash in your account that can be used instead of taking out short term loans,” says Nel.
The benefits of prepaying into a home loan are tabulated as follows.
The greater the repayment consumers are prepared to make towards their home loan, the lower term they will pay the loan off over, the more interest they will save and the greater the available pre-paid funds that they will have at their disposal.