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So you have a bond? Congratulations! Now do your best to get rid of it as quickly as possible.
Many people view bond repayments as a regular, unchangeable monthly expense that they have to pay for the next 20 years. In truth, there is a lot you can do to reduce the term of your bond, which also reduces the interest you’ll pay over time.
So whether you have a small amount of extra money in your monthly budget or a large, once-off payment like an inheritance or a year-end bonus, the best place for that money is your bond. You need to ensure, however, that the following are under control before you start paying extra into your home loan:
- All of your other essential monthly expenses are covered.
- All your other debt has been paid off. Your bond offers you a lower interest rate than almost any other line of credit, so there’s no point in paying off your bond while other loans are charging you more.
- You have suitable insurance cover for all your requirements and responsibilities.
- You have a savings buffer of three to six months’ worth of your salary available to you. However if you have an access bond, it’s fine for this money to sit in your home loan account because you can access it in case of an emergency.
Getting started
Now for the maths. Here is what you will pay each month for the next 20 years on a property that costs you R800 000 at a 9.25% interest rate:
Bond amount: R800 000
Monthly repayment: R7 327
Term of bond: 20 years
Total you will have paid at the end of 20 years: R1 758 464
Total interest paid over 20 years: R958 464
Paying double
Now here is what your bond will cost you in the event that you can afford to double your monthly repayments:
Bond amount: R800 000
Monthly repayment: R14 654
Term of bond: Reduces to 5.93 years
Total you will have paid at the end of 5.93 years: R1 042 243
You will have saved: R716 221
That’s a great saving on interest and a great reduction in term.
Overpaying by R500
Realistically, however, most people can’t afford to double their bond repayments, so here’s a calculation that will show you the benefit of just paying R500 extra into your bond each month.
Bond amount: R800 000
Monthly repayment: R7 827
Term of bond: Reduces to 16.83 years
Total you will have paid at the end of 16.83 years: R1 580 489
You will have saved: R177 995
This illustrates that even a small monthly overpayment can shave years off your bond term and over R100 000 off the interest.
Paying in a once-off extra amount
Finally, here’s a calculation of what will happen if you put your December bonus of R20 000 into your home loan account.
Bond amount: R800 000
Monthly repayment: R7 327
Once-off payment: R20 000
Term of bond: Reduces to 18.64 years
Total you will have paid at the end of 18.64 years: R1 639 035
You will have saved: R119 429
R99 000 is a massive return on only R20 000. And if you pay your bonus in every year, your bond term and interest will continue to reduce in the same way.
Seeing the bigger picture
When financial advisers talk about terms and interest rates, it can sometimes be difficult to work out what the tangible benefits of bond overpayment will be. These calculations illustrate how powerful the effects of reducing your interest payments are. Do what you can to pay your bond off as quickly as possible and reap the benefits of financial freedom much sooner than you’d planned to.
If you would like to do calculations like these on your specific bond and repayments, banks and bond originators have online calculators that can assist.
