I have been retrenched and have a bond of R430 000 with about 14 years left to pay it off. I have decided to pay all [other] debt and will be left with about R200 000 which I would like to put towards my bond. This can only assist me if it brings my monthly payment down, and not the length of my repayment period. Can it be done this way?
I would like to bring the instalments down because I’ve decided to work privately instead of returning to work for a company, so my concern would be being able to easily cover the instalments when starting up my business.
Thank you for reaching out to us and well done on taking this step towards self-employment. As you have correctly noted, containing costs and carefully managing one’s cash flow is important when starting one’s own business.
Generally speaking, when it comes to secured loans such as a bond, the normal practice is that any lump sum payments made into the home loan will have the effect of reducing the capital amount owing on the loan and will not serve to reduce the term of the loan. This means that if you inject R200 000 into your home loan, your monthly repayments should decrease because the capital amount owing on the loan will decrease.
Where a bondholder wishes to reduce the term of their home loan, they can make a lump sum payment into the home loan and then instruct the bank to retain their bond repayments at the same level. Keeping their premiums at a higher level will ensure that they are able to pay off the home loan quicker. However, considering that you are trying to keep your monthly expenses to a minimum while you set up your business, this is not the approach you want to take. As a result, we suggest that when making your lump sum payment of R200 000 into your home loan, you simultaneously issue your bank with a written instruction confirming that you want the term of your home loan to remain unchanged and that you want your monthly premiums adjusted in accordance with the reduced capital amount outstanding.
As we do not have insight into the exact interest rate you are being charged on your home loan nor what your starting bond value was, we are not in a position to provide you with an accurate calculation of what your bond repayments will be once you have made your lump sum payment into the home loan. However, by making a few assumptions in this regard, we have developed a scenario for you which demonstrates the principle. We have assumed that your current home loan of R430 000 has a time horizon of 20 years and that you are paying interest at a rate of 10% per year.
Using the amortisation calculator, we have calculated your currently monthly bond repayments to be in the amount of R4 765. Assuming that you pay an amount of R200 000 into your home loan, thereby reducing the capital value by the same amount, our calculations show that your new monthly repayments would reduce by R2 216 to R2 549, which is an effective 46.5% reduction in repayment, with the term of the loan remaining unchanged.
We believe this is an excellent way to contain monthly costs and commend you for doing so. As and when you are able to inject any additional capital into your home loan, we encourage you to do so as this will have the effect of further reducing your monthly repayments. Should you require any additional advice, please do not hesitate to contact us directly.