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5 ways to hack a home loan

You can be a bond-free property owner in 13 years instead of 20.
A 20-year home loan means you will pay around double the purchase price of the house after you factor in the interest. Image: Getty Images

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.

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Really great suggestions. One last one. If your payment date is say 30th of the month – try and pay a few days early.

Also if you have an access bond put your whole salary in the bond. Then draw the funds out as you need to pay accounts.

That way you have a 7% savings account rather than the measly 2 or 3% you get elsewhere.

Another hack is don’t go to FNB for a homeloan.

Whatever you do, don’t use a BOND ORIGINATOR.

It is costing me 0.25% over the life of the my bond and I could have negotiated the saving myself. So the 0.25% I saved was negated by the originator’s commission.

My girlfriend recently bought a second hand Kia Picanto. Without a deposit, Wesbank offered her a prime +1% interest rate. Upon adding a 13% deposit her interest rate when up to prime +1.3%. Might be different for a house but becareful with banks. They won’t let you win as easily as this article suggests.

With respect to a house, I tried getting one from Cosmo developers recently. I wanted the cheapest 2 bedroom. Upon seeing how much I make, they told me they didn’t have the cheaper house I wanted and pushed me to the 3 bedrooms which were mostly 200K+ more than what I wanted. I’ve since stopped and will rent on until I have a need for such a house.

The big question is, is it worth buying in an unstable SA?

No, rather use the money to GTFO

While this is valuable and responsible advice, you have to take into account the opportunity cost of a) paying a deposit and b) putting extra into your home loan. For instance, you could be considerably better off by investing that deposit into a TFSA or some other investment vehicle and hopefully you could get >7% return of the mortgage. Risky, I know. And not for undisciplined savers. But one could also consider something like a Bond fund or fixed deposit which is a little more predictable and could get around 10%.

The amount of interest you ‘save’ is determined by inflation which affects the time value of the savings. But it is safe to say the R460k saved in Option 5 is not a real R460k.
Personally, I would take the approach of putting any excess deposit and excess payments in a low cost offshore investment. That diversifies risk away from SA and, if inflation goes up resulting in a higher bond rate, then the rand will likely weaken so you have some offset.

All good points argued by the writer (and co-commentators)

Personally I’m a bit weary of ‘point 3’…pay extra in your bond if you can.

Yes, financially not a bad habit, as the build-up of “access bond” can later pay for a car, holiday, renovations, etc (and ‘financed’ by your home loan)

But also bear in mind, if you stick for the full 20y term…towards the end, future inflation will diminish the current value of future bond-instalments…you won’t feel it.

Secondly, the issue of cyber security risk….and almost everyone has online banking these days: lo and behold IF or when the day comes when your desktop/tablet/phone has been compromised by malware & the hacker gains access to your online banking login details…..you WILL REGRET that you’ve saved a few hundred thousand rand in your access-bond….much of it will be gone (thanks to crypto purchases by the hacker). Be mindful of having too high access bond build up….rather store your available free capital with your asset manager or stockbroker, offshore, etc.

Let me get this straight – Don’t pay quickly and thieves might steal your money.

Lets deal with the access bond first.

1. You do not have to have an Access Bond, that is a consumer choice.
2. If you have an Access Bond you can ask the bank to capitalise the balance
3. The whole point of paying your bond early is not to use your bond to save for a car or a holiday – again your access bond story is flawed.

2. Cyber Security

1. Last time I checked, asset managers and stockbrokers use platforms that can be hacked. the risk is equal. Not a risk if you capitalise your payments

2. Offshore bank accounts are accessed via online banking, unless you have a private jet to fly to your offshore bank, same risk

3. Asset Managers charge a % some get as high as 6% if I am not mistaken.

Personally in my experience – Paying extra into a bond, especially if you do not store money in the access portion is brilliant discipline, it becomes part of your monthly costs and you never have an opportunity to un-capitalize it.

At the end of the day – to each his own, so thank you for the insights, but I gracefully disagree.

@za_investor. I hear what you say & I respect your view.

Yes, when one save extra into your bond (and we get shown MANY of these graphs, where one save like a few hundred thousand in bank interest over the term of homeloan. What most people forget, is that most of the interest-saving comes from the “future value” towards the end of the term. When one discount future value (FV) to present value (PV) the interest saving is not that dramatic, as always depicted.

It’s also called “debt reduction by way of inflation”.

Online risk you claim is “equal”, being with your bank or asset manager/stock broker. When one’s online banking login details are compromised, a hacker simply transfers money from your bond-account (when phone SIM is also compromised) to your current/savings account, and then purchase crypto with it and be gone.

Then go and try to purchase crypto (even if someone has your login/pw access) when logged in onto your Coronations/AllanGrays/Investecs/ShareTrading accounts. (Coronation, for one example, it’s not that easy to update a new bank account to cash out into…too many checks that makes hackers look for easier victims..and must be held in your own name. Coro’s staff also phone clients to verify transactions, and they use smart voice-recognition software. They will be able to tell if they speak to an impersonator.)

Your & my online banking do not apply voice recognition when we transact online. Not the same cyber risk. Think again!

Be safe.

If you have an “access” bond — one that allows you to overpay in and make withdrawals:-
• have your salary paid directly into your bond account
• ask for your insurance, etc debit orders to be deducted as late as possible in the month
• leave your money as long as possible in the bond until you need to transfer it out to cover living expenses and the debit orders. (Watch for bank charges on inter-account transfers; leaving, say, R1,000 an extra day may cost more in charges than you save)

By doing the above, you are reducing the outstanding balance for part of the month. As the article points out, interest is calculated daily on the outstanding balance.

Over 15 – 20 years the saving can be considerable. Especially, as the article says, you leave some extra behind every month.

All prudent advice (but not rocket science) and makes sense in a normal market/country
If I were still in SA and had spare cash I would pump it all offshore.

If the EFF/ANC starts expropriating property I would rather hand the keys to the banks with a big bond open and walk away
Instead of having all you savings tied up in the home loan….if property expropriation starts house prices will plunge and you might struggle to access your access bond…

End of comments.

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