A Fast Track To Savings

Homeowners on a tight budget can still pay off their bond faster.  A small increase on a homeowner's monthly bond repayment can make a big difference in the quantity of time it takes to pay it off, said Adrian Goslett, CEO of RE/MAX of Southern Africa.

For example, on a 20-year bond of R500 000 at an interest of 11%, the monthly bond repayment will be in the region of R5 160.  If the homeowner pays just R300 extra into their bond every month, they will save over R144 000 and cut the term of their bond by almost four years, said Goslett.

"This may be just a small step, but it can fast track a homeowner's path to financial freedom," Goslett said.  If a homeowner is financially stretched to the limit and cannot afford to pay additional money into their bond, they could rather focus on finding ways to reduce the payable interest.  He notes that on a bond of R1-million, a reduction of as little as 0,5% on the interest rate can result in a saving of over R76 000 for a 20-year home loan.

In some cases switching from one financial institution to another could reduce the interest rate.  "Keep in mind, homeowners that do consider this option could face paying bond cancellation and penalty fees, which will severely reduce any benefit or profit achieved from obtaining the lower rate," Goslett warned.

According to Goslett, if a homeowner does obtain a lower interest rate through switching banks or a general interest rate cut, they should still keep their monthly repayments at the same amount.  Banks will usually automatically reduce monthly payments according to the prime interest rates fluctuation.  Homeowners can, however, have the repayment stabilised.  Maintaining the original bond repayment at the reduced interest rate will mean that they are getting the benefit of paying extra into their home loan every month, without having to find additional money in the budget. 

Homeowners can make further savings on their home loan interest if they have an access bond where they can transfer extra lump sums of money into the loan account Goslett said.  The interest rate payable on the home loan account is calculated daily based on the outstanding balance.  This means that if a homeowner has access to the home loan account and is able to transfer cash into the account when they have it, they can reduce the amount of daily interest charged for the period that the money is in the account.  Even if the money is only in the account for a short while until the homeowner requires it and needs to withdraw it again, the interest over that period will still be less.  "The savings on the daily interest amount might seem small, but it will add up over the term of the loan," added Goslett.