For those of us who aren’t trust fund babies, a home loan is pretty much unavoidable if you want to buy a house.
And due to the duration of a standard home loan, doing it this way means you are going to be paying a lot of interest – a 20-year home loan means you will pay around double the purchase price of the house after you factor in the interest.
A R1 million bond over 20 years with an interest rate of prime (7%) will have a monthly instalment of R7 753.
Paying the minimum means the bond is paid off in 20 years (240 months) and the total interest bill will be around R860 000.
So how do you reduce the amount of interest you pay and the time it takes you to own your house outright?
1. Have a deposit
A 10% deposit reduces the bond amount to R900 000.
That means the monthly instalment is now R6 978 (which is around R775 less per month). The total interest bill becomes R775 000 (which is R86 000 less than the R1 million bond.)
A deposit is also a great way of showing the bank you are a good financial planner (since you were able to save up towards a deposit). It also reduces the bank’s risk. It is now only lending R900 000 for something that is technically worth R1 million. This gives it a bit of a cushion if something goes wrong.
All this means that having a deposit not only saves you a lot of interest, but will also improve your chances of getting a bond approved and can help you negotiate a better interest rate (which, as you will see next, can save you even more).
2. Negotiate a better interest rate
When applying for a home loan, apply at all the banks (not just the people you bank with). Use a bond originator as well. Then wait and compare the banks’ offers, and negotiate using the best offer you received as ammunition. When you are done, go back one more time and ask the bank if that is their best offer.
This seems like a lot of effort. Is it worth it? Well, even a small reduction in the interest rate of your bond can pack a big punch! A 0.25% reduction on a R1 million bond reduces the instalment to R7 604 per month and saves you R35 800 in interest!
3. Pay extra if you can
The interest on your home loan is calculated daily. That means if you make additional payments into your bond, it immediately starts reducing your interest bill.Even an extra R200 a month:
- Saves you about R52 000 in interest, and
- Means your bond is paid off one year faster.
4. Negotiate the purchase price/buy for less
Negotiating the purchase price of the property and/or buying a house for a little bit less than you can afford can save you thousands of rands of interest. A lower home loan amount has a huge impact on the total cost of a home loan – especially if you put the savings into the bond as an extra payment.A R900 000 home loan has an instalment that is around R775 a month less than the instalment on a R1 million home loan. If you put that R775 monthly saving back into the bond:
- Interest saved: around R250 000, and
- Bond paid off in around 16 years.
5. The biggest hack – do all of the above
What if you managed to:
– Buy for R900 000 (instead of R1 million);
– Put down a 10% deposit (a R90 000 deposit means a home loan of R810 000);
– Got your interest rate down to 6.75%;
– Put all savings back into your bond; and
– Paid an extra R200 a month?
Congratulations! You have just saved yourself R460 000 in interest and paid off your home loan in 13 years instead of 20!
You’re not done saving …
When you are done implementing these hacks, take note of this: some banks allow you to renegotiate your home loan interest rate once the loan has been running for a while. If you have been a good payer, and especially if you are ahead of your payments, you can probably get your bank to squeeze out some more interest rate savings for you – but you have to ask (they won’t just do it out of the goodness of their hearts!).
I managed to get the bank to lower my interest rate by simply dropping them a mail and asking.
Just be aware that only some banks will renegotiate your rate; others won’t.
And finally, if you want to stay on top of your home loan and check out the dent you are making with extra payments, download this home loan tracking spreadsheet and watch how your home loan freedom date gets pulled closer and closer.
This article was originally published on the Stealthy Wealth blog here.