Inge Lamprecht
3 minute read
19 Jul 2014
3:00 pm

Pay off your home in seven years

Inge Lamprecht

Generally speaking, many South Africans sell their current home every seven years and upgrade to a new, often larger property.

Image courtesy: Thinkstock

A recent article warned against this type of behaviour. While a number of commentators maintain that a primary home is not an asset, for those who have chosen to buy a home there can be significant benefits to paying additional funds into their home loan. Just imagine moving to a new home after seven years and the previous one being fully paid.

While buyers often stretch their bond to as much as they can afford, in truth they should really take a smaller bond (ie buy a smaller property) – one that they can easily afford, advises Simon Brown, founder of JustOneLap.

In an interview with SAfm Market Update with Moneyweb recently, Brown explained how homebuyers could reduce their repayment term to as little as seven years.

The first step is to increase the monthly payment required by the bank by at least 10%, which will make a significant difference in time, he says.

Thus, if the bank requires a monthly repayment of R5 000, buyers should pay at least R5 500.

The second step is to increase this payment every year as your salary increases. “Even if it is just 6%, you are taking home 6% more than you were the year before.”

Although you are already paying 10% extra, also increase the payment in line with your salary increases.

“In other words, if your bond repayment is 10% of your take-home pay, keep it consistently at that 10%,” he says.

And finally, make sure that the debit order is paid on the same day as your salary.

Brown says typically people pay their bonds on the first or the last day of the month. If they are, however, getting paid on the 25th day of the month, the payment should be moved five or six days earlier.

While this does not have a significant impact in a single month, it can slice a year to a year and a half off the repayment term, he says.

Discipline

This approach will require significant discipline for most consumers, but every additional payment into your bond can make a difference.

Many commentators believe it would be difficult to get double-digit returns from most asset classes in the next couple of years.

Warren Ingram, director at Galileo Capital, says he would definitely advise investors to pay extra money they have available into their bond. Against the background of a rising interest rate cycle it is not impossible that the prime rate, which is currently 9.25%, might increase to 10% in the next two years.

There are very few, if any, investments that are guaranteed to provide investors with a return of 10% per annum, whereas, should investors decide to pay additional funds into their bond, they know exactly what the saving would be, he says. Ingram adds that if someone plans to live in the same property for a period of eight years or longer, it would make sense to buy the property.

Average salary earners are so overindebted if they don’t have an income for three months, they have to sell something to get by, he says.

The benefit of paying extra money into a bond is that you get room to breathe and have some reserves and emergency money if you need it, he says.