It may be the biggest financial decision you ever make, because a bond is such a long-term commitment, but it can be surprisingly easy to pay off early.
- Given that it is such a large and long-term financial commitment, paying off your bond quicker can save you a lot of money in the long run.
- You could get out of a year’s worth of bond repayments – or even a whole decade’s worth – by paying a little extra into your bond every month.
- One or a combination of these savvy savings solutions will help you reach financial freedom that much faster.
A home loan may be the biggest debt you’ll ever take on but, because it’s such a large, long-term financial commitment, it can be surprisingly easy to pay it off at least a little early.
“You might get out of a year’s worth of payments (or more) simply by throwing a bit extra towards your bond each month,” says Careen McKinon, Head of evo.
Here, she provides a handful of clever tricks, some of which may even have you paying off your bond 10 years early. Others will shave off a few months or years. Either way, any of these options could save you money in the end and help you reach financial freedom faster. If your budget allows, consider using a combination of these approaches to really hit that debt hard.
1. Find extra cash
Cash in your emergency savings accounts and deposit those funds into your bond account. This will also give you tax benefits. Another way of raising extra cash to reduce your bond account is to sell unused furniture/appliances, such as that old tumble dryer or television set gathering dust in the garage. You could even rent out unused space on your property and deposit this rental income into your bond.
2. Pay extra into your bond
Consistently adding just R1 000 to your monthly bond payment can make a big difference, McKinon explains.
“Let’s say you buy a house for R2 million and put down a R500 000 deposit. So you have a R1.5 million bond at an interest rate of 10.25%. That gives a monthly payment of R14 725 over 20 years. Now let’s say you can afford to pay R1 000 more (R15 725) and maintain that every month. If interest rates stay the same (a big if), you could pay off your bond more than three years early, and save R416 421 in interest, compared with having a bond for 20 years.”
“If you upped that monthly amount by R2 500 – if you could afford to – you could pay off your bond in just over 13 years and save R775 850 in interest,” she adds.
|Overpayment||Amount paid back||Time to pay back||Interest paid|
|None||R3 533 916||20 years||R2 033 916|
|R1 000 per month||R3 117 495||16.52 years||R1 617 495|
|R2 500 per month||R2 758 066||13.34 years||R1 258 066|
Source: evo’s Extra Bond Payment Calculator
“The biggest problem with this approach, though, is that it requires willpower,” she notes. “To reap those benefits, you have to voluntarily put an extra R1 000 towards your bond payment every month.”
3. Apply pay raises to your bond
One way to find extra cash to put toward your home loan is to deposit money you get from raises and bonuses.
“The goal is to put the same percentage of your income toward your bond, even when your pay goes up,” says McKinon. “In other words, if you’re currently putting 15% of your income towards your bond payment, 15% of each annual raise amount should also go towards your bond, in addition to what you’re already paying. If you’re leading a comfortable lifestyle and can avoid lifestyle inflation that often follows a raise, you can put your entire raise amount towards your bond balance.”
This strategy works best for those who get regular raises over and above minor cost-of-living adjustments, she says. “But, if you aren’t expecting to see your income increase anytime soon, this strategy might not be the best option to start with.”
4. Use cash windfalls to pay lump sums
Instead of paying a little extra each month, you could pay a large lump sum here and there, suggests McKinon. “This can be done with a cash windfall, such as from an annual tax refund, 13th cheque or bonus, or inheritance.”
So if you put R30 000 towards your home loan when you get your tax refund, all of your payments from there on out are a little more effective, because less of them are going towards interest.”
5. Set a target payoff date
“Setting a target payoff date allows you to know exactly how much extra to pay each month to be bond-free by a certain date,” says McKinon, adding that you’ll have the extra motivation of marking your calendar to plan the celebration!
A bond repayment calculator is a good one for helping you do the maths here. Let’s say you want to pay off that R1.5 million bond in 15 years when your child goes to university. You’ll need to put an extra R1 624 towards your payment each month. What if you want to pay off your bond in 10 years? You’ll have to increase your payments to R20 031 to achieve this goal.
Of course, there’s no need to select only one method from this list, says McKinon. “Many bondholders choose a few options and combine them to pay off their loans even earlier.
And in the world of personal finance, every penny saved is a penny earned… so, go save yourself some interest and pay off that bond early!
evo also offers a range of home loan calculators to help make the home-buying process easier. Get prequalified for a home loan with evo, then, when you’re ready, you can apply for a home loan with evo.