Some six years ago I took out a home loan for R830 000 with Standard Bank. I am paying the monthly instalment very well as agreed, but lately I have a strong feeling that I need to pay it faster to shorten the loan period. I recently visited the bank to increase my monthly instalment from R8 533 to R10 000 monthly. Please advise me on what to do since I don’t want to work for the bond for the rest of my life. I know I have the potential.
Because of the limited information we have with regards to the bond we have made some assumptions.
We have assumed the following:
- Your bond is a 20-year term,
- Your interest rate is a floating rate of prime plus 3.5%, and
- You have a remaining 14 years on your bond term.
After the first six years of home loan repayment, you will currently owe approximately R730 383.08 of the capital borrowed. This is because the majority of your repayments in the first few years go toward paying off interest and a smaller amount to capital.
By increasing your repayment to R10 000 per month, which is an additional R1 467, and at a current prime interest rate of 7.25%, you will reduce the remaining term from 14 years to 10 years. This will save you a total of R224 629.62 in interest, which translates to R136 721.01 in today’s terms assuming an inflation rate of 6%.
When assessing whether you should make additional payments to a bond you should first look at some of the potential consequences of making these additional payments.
The first enquiry you should make to the bank is to determine whether your home loan has an access facility. An access facility simply means that the extra payments made toward your home loan are accessible in future should you need emergency funds. This facility may be a 100% access, meaning all additional payments are available to be withdrawn; or the access bond could allow for only a proportion of the funds to be accessed, for example, 70%.
Some bonds do not include an access facility, and this means that you will not be able to access additional funds in the future. In the absence of an access bond, you may prefer to house any additional funds in a savings account or money market account rather than committing them to your home loan.
If you have additional funds available on a monthly basis, you would do well to look at any other debt that you have in place, such as personal loans, credit cards or store accounts. These loans are usually charged at a much higher interest rate than on a home loan and therefore could be settled at a faster rate which may improve your monthly cash flow.
Settling these shorter-term loans may then also allow you to pay the additional R1 467 per month plus the payment on the other debt (credit card and so on) toward the home loan, enabling you to become debt-free at a faster rate than expected.