How to get your house paid off in less than half the period
If you were courageous enough to buy a home, you will reap huge benefits by paying additional funds into your home loan. Can you imagine moving to a new home or a second home, after seven years and the first house paid off?! It is yours now and doesn’t belong to the bank anymore.
Most buyers often take as large a bond as they can possibly afford. What they should really do is take a smaller bond, thus buy a smaller property. Something they could easily afford.
Get your house paid off over a reduced term
How to do it:
Increase the repayment, as determined by the bank, by a minimum of 10%. This will make a significant difference in the period. If the bank requires a repayment of R5000, you should pay at least R5500.
Every year when you have a salary increase, even a tiny increase, you should increase the repayment, in line with your new salary. Keep the percentage of your bond to your income, consistent.
Arrange for the debit order to be paid on the same day as your salary. Doing this wont show an effect in any month, but will decrease your repayment term by up to 18 months. Paying your bond on the first of the month or the date set by the bank, interest is calculated on the outstanding balance as at the day before. Paying early reduces the interest.
Discipline gets your house paid off quicker
Paying more than is absolutely necessary, requires substantial discipline for most buyers. Just know that every added payment to your bond, makes a difference. Not only in the repayment term, but also the total amount you pay.
Recently the prime rate, which was 9.25% increased to 9.5% and might increase to 10% in the next twenty four months. There are hardly any investments that are guaranteed to yield a return of 10% per annum. When you pay additional funds to your bond, you’ll be saving 10% on that amount.
Buying or renting?
When you wonder whether you should buy or rent the property you live in, it makes sense to buy if you’ll be living there for eight or more years. Staying in a property for a shorter time, the transaction costs of buying and selling, makes renting a wiser option. From eight years on, rental escalations will outweigh the benefits of renting and it makes more sense to buy.
Other benefits of paying more than required
The substantial interest rate saving is not the only benefit of increasing your bond repayments. These days employment is not guaranteed to the employable. Many salary earners are so over-indebted that being without a salary for three months, will force them to sell something, just to get by.
A benefit of paying extra to your bond is having some breathing space, some capital and emergency money if you need it.