The benefits of paying R100 extra on your bond

NASTASSIA ARENDSE:  We are looking at what it means to pay an extra R100 on your bond. Does it matter? Dr Simphiwe Madikizela, who is the head of special projects at FNB Housing Finance will help us answer that question. Doctor, thanks so much for your time.

SIMPHIWE MADIKIZELA:  Good evening to you and to your listeners, and thank you for inviting us to your show.

NASTASSIA ARENDSE:  Take me through this rationale of paying an extra R100 on my bond. It’s a small fee, but from your perspective it makes a big difference.

SIMPHIWE MADIKIZELA:  Certainly it does make a very big difference, just paying an extra R100 on your bond. Let’s assume that you are paying a bond of R500 000 over a period of 20 years, and assume the rate of prime is 10.25% – by doing this you can actually save almost R50 000 in interest over the period of 240 months. That’s a lot of money. Even if you pay half of that, or R60 extra, you are still saving R26 000 over the same period.

So it makes a big difference because you are not just saving on the interest, but you are also shortening the number of years in which you would have paid your bond. For example, with R100 you would have paid your bond in 18 years and eight months, instead of in 20 years or 240 months. So that’s a big difference.

NASTASSIA ARENDSE:  So what about my first home loan? I suppose the first payment I make typically goes towards my interest. Take me though the difference between understanding that, the interest you generally pay and then the principal debt.

SIMPHIWE MADIKIZELA:  Certainly. For the first few years you will be paying the interest. So that why, if you are able to pay a little extra on the normal monthly instalment that you’d have signed for in your contract, you can actually make sure that you save on that interest portion which you were paying off. And also you won’t then pay just interest only. You’ll also go to the capital amount which you’d have borrowed, and you’ll begin to reduce that by just paying a little bit extra. What a bank does, not only will they service the interest, but if you are paying more they will also service the principal debt, which saves you a lot of money as a customer on both the interest that you are charged, as well as the original loan amount or capital amount as we normally call it.

So it’s actually a very good practice that we like to recommend to our customers, because it’s in their best interest. Interestingly enough, although the bond is 20 years, the attrition rate is 7.5 years. No one actually stays and pays the bond for 20 years, more especially first-time buyers. You typically start up with a two-bedroom house or beginner’s home. You might be a new couple, newlyweds, without children as yet. But over a period of time, once you start having children, that two-bedroom house…becomes too small. You might need a bigger place as well.

So you graduate from the two-bedroom house, let’s say, to a three-bedroom house. You are freeing up that two-bedroom house for someone to start there as you move on. That’s how the market works – you graduate. But we encourage people to pay a bit more if they can.

If you get a bonus or a lump sum, maybe from your tax return, you can put that money into your account as well. You’ll reduce the term and the number of years and you’ll save a lot on the interest.

NASTASSIA ARENDSE:  Dr Simphiwe Madikizela, thank you so much for your time.

SIMPHIWE MADIKIZELA:  Thank you for inviting us. We really encourage listeners to do this. They’ll see a difference in their pockets.

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