Shaun Rademeyer, CEO of bond originator BetterLife Home Loans, says that while most home loans are approved with a 20-year repayment term, paying even just a little extra each month can shave years off your arrangement, thereby saving you in interest.
Rademeyer noted that on a R1 million property bought with a 90% loan, buyers could save over R700,000 in interest by paying off their bond in half the time.
“Over 20 years and at the current prime rate of 10.5%, they would pay around R1.257 million in interest, taking the total cost of their home to R2.257 million.
“However, if they paid the same loan off over 10 years, they would pay only R554,000 in interest and thereby substantially lower the total cost of the property,” he said.
The way to do this, he explained, would be to try to pay an additional R3,200 a month off the capital portion of the home loan.
“What is more, the total of the additional amounts paid over 10 years would only be R384,000 – or just over half of the R700,000 saving in interest – so this would be really a good investment, especially when you consider that at the end of that period you would also own a home that was fully paid for.”
Rademeyer pointed out that many families spend R3,200 a month on a second car, for example, and might well consider doing without that.
And for those on a really tight budget already, the property expert said that substantial savings can be made even on an additional R300 each month.
“Just that amount will cut your loan term on a R1 million home down to 18 years – and save you R148,000 in interest.
“That represents a whopping 128% return on the additional R64,800 you would be paying into the home loan account, which in investment terms is guaranteed return of significantly more than you could hope to earn at this stage by putting that money in savings or a money market account – or investing it in the stock exchange,” Rademeyer said.
Original article from BusinessTech.