For most people, buying their own home will cost them almost three times its value. The interest payments alone on the bond will add up to about twice the price of the house.
So, why not pay off your bond years ahead of time and save thousands of rands in interest payments. Redeeming your bond early and paying less is easy. All you have to know is how the system works; and how to beat it.
How the system works
Whatever type of bond you choose, you’ll have to pay interest, and accumulate enough capital to repay the original amount. This interest is the big addition to the cost of your home – and is where you can save the most money by making payments that reduce the capital on which future interest payments are calculated.
How you can beat the system
Simply pay more than you have to each month. This reduces the effects of compound interest on your original loan. Write to your bank, indicating that you wish to increase your payments. Ask for this to be agreed in writing and request a breakdown of how these over payments will affect your bond and what your new redemption date is. Alternative: ask your lender to work out how much extra you will have to pay each month to reduce your bond term by a specified number of years. And: paying more than you have to acts as an insurance policy – it allows you to miss one or two payments later when your budget may be stretched.
To illustrate the effects of paying extra each month, consider this scenario based on a bond repayment at 15% interest over a 20-year term. Amount borrowed: R1,000,000. Contractual payment R13,167.90 per month. If you increase monthly payments to R13,952.14 (R784.24 more a month), your revised bond period would be 15.58 years and you’d save R551,804.00. Pay R14,452.14 (just over R1,000 more) a month, and the bond period would be 13.8 years and you’d save R767,021.70.
Be aware of how banks make money from from your bond payments
Some banks leave over payments in limbo until their year-end, when the extra amount is set against your bond. In effect, you’re giving your bank an interest-free loan. Remedy: put the extra payments into a high-earning, savings account where it will earn interest – then transfer it across to your bond account just before the bank’s year-end. And: many banks suggest it is better to adopt this method and overpay your bond once a year; including interest on your savings. Make sure you make your annual repayment just before the appropriate date, not immediately afterwards which will mean you have to wait a whole year before obtaining the benefits. Important: with the new credit act, banks can now only charge you 3 months’ interest for early settlements – so check this with your bank.
When interest rates drop, don’t reduce your monthly payments – continue making payments at the higher level. Try to repay as much as you can when interest rates are low to achieve even higher savings. Also: endowment bond holders should review their policy and investment performance at regular intervals to be sure that it keeps pace with the amount outstanding on the bond. And: re-arrange your policy to ensure it matures at the same time as the amended repayment date for your bond.