It pays to invest more into home bond repayments

Why would you choose to be penny wise but pound foolish when it comes to your house bond?

Some minor forward-planning can save you thousands of rands and shave years off your expensive bond repayments.

Most people may be tempted to simply forget about their bond repayment once it has been secured, simply allowing it to continue for the next 20 to 30 years without any afterthought.

But paying slightly more on your bond repayments every month hold enormous financial benefits.

BetterBond home loans consultant Stephanie Jansen van Vuuren told the Courier that doing so rapidly reduces the outstanding balance and interest.

These savings can be channelled into more profitable avenues, such as putting money towards your children’s education, or creating wealth for you and your family through investments.

So how does one go about it?

It starts with higher payments which, despite what one may think is possible in these tough economic times, won’t necessarily cripple your finances. It just takes better budget planning.

By arranging to pay your bond off at 2-3% more than the minimum monthly repayment, this slight adjustment will save you considerable money and years in debt repayment.

If the interest rate drops, keep your repayment at the same level, and, if interest rates increase, you won’t need to find extra funds to keep up.

“You can transfer money from your normal account to your bond, or amend the debit order to a higher payment,” said Jansen van Vuuren.

Frequent payments as opposed to one, single payment per month, could also make a massive dent in the total amount owed.

By splitting your repayment into two, and paying every fortnight, you will effectively be making 13 payments every year as opposed to 12.

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For many, this would translate to shaving off a total of 54 months off your loan without realising it.

Interest rates on home loans are also calculated daily, which means that paying earlier in the month will save you on interest.

“Splitting your payments is beneficial. Once again, the less you owe, the less interest is charged. By simply paying 10% extra of your monthly premium, you can reduce your term by many years,” said Jansen van Vuuren.

Lump sums are also an effective way of reducing your balance, and yes, every extra bit above the minimum repayment goes directly toward the capital amount instead of interest. Instead of spending your annual bonus or other additional funds on unnecessary items, you should consider paying these into your bond account.

With bonds, early years of repayment are spent paying off interest, leaving the principal amount unchanged, but with some minor planning this doesn’t have to be the case.

Some may suggest consolidating one’s debt under your home loan, but this is not always a good idea.

Jansen van Vuuren said doing so is expensive, unless you are able to secure a very good interest rate on your bond.

“But the term on a bond is much longer, so you will be paying off for a long period which will ultimately cost you money.”

But a bond is an excellent savings vehicle and should not be overlooked.

Banks charge a higher interest rate to people borrowing money from them, from which they pay people saving with them.

Should you deposit your savings into your bond, you will receive the interest rate the bank charges you on your loan as a positive interest on the money you invest.

This is much higher than funds deposited into your savings account.

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