If you can afford to pay off your house early, you’ll save some money on your loan’s interest. But if you’re planning to take that approach, you’ll need to consider if there’s a pre-payment penalty, among other possible issues.
Working Out Your Home Loan Costs
When buying a house, very few of us are able to make the purchase without getting a home loan. The monthly home loan repayment amount can be quickly estimated using a bond calculator, but it’s important to remember that there are other costs associated with a home purchase. Some of the costs to factor in are the:
Transfer duty – The tax levied for transferring a property from a seller to a buyer’s name. This applies to homes costing more than R1m.
Conveyancing attorney fees – The amount paid to the attorney responsible for the transfer.
Bond registration – This is the amount paid to the Deeds Office for the legal registration of your home loan.
Home loan initiation fees – The administrative fees attached to the processing of your home loan application.
What Are the Benefits of Paying Off Your Bond Early?
Once your bond has been approved and the initial home purchase payments sorted, then you’ll need to start your monthly bond repayments. Most home loan repayments are worked out over a 20-year period, but this doesn’t mean that you can’t pay off your home loan that much sooner. Here are some of the benefits of paying off your bond early.
1. You Save on Interest Costs
By settling your home loan early, you will benefit from savings related to the interest on your loan. If you stick to paying the same amount over the 20-year period, you are paying significantly more in interest on a monthly basis. However, every month saved on your repayment fees is interest saved as well. For example:
Home loan = R975 000
Monthly repayment = R9 600
Home loan period = 20 years
Total interest paid = R1,3m
But if you decide to pay just 10% more on your monthly repayment, it works out to this:
Monthly repayment = R10 560
Home loan period = 15 years 4 months
Total interest paid = R940 000
*Savings = R360 000
This means massive returns for just 10% more – R960 extra – per month.
2. Reduce Your Retirement Costs
For those of you approaching your golden years, then paying off your house as early as possible is certainly a smart move. The reason being that once the home is paid off, you’re minimising your monthly expenses – which generally account for about 25% of your income – then you’re freeing up funds to be spent in retirement.
3. Minimise Your Financial Risk
The housing crisis in the United States and the ongoing Covid-19 pandemic have shown us that financial risk is literally around the corner, no matter how well we try to prepare ourselves. By paying off your bond early, you’re eliminating the risk of defaulting on your monthly repayments if you’re suddenly in a situation where you’re earning significantly less or are unemployed. Life is uncertain, which is why it’s always best to be as debt-free as possible.
4. Frees up Your Disposable Income
As mentioned earlier, home loan repayments often account for around 25% of a person’s income – sometimes more – which is a huge financial burden. This restricts your lifestyle, and while paying more into your monthly repayments might restrict you somewhat further now, the financial freedom of not paying off a bond is huge. You have access to much more disposable income which can go towards other investments or savings.
5. You Make a Profit When Downsizing
If you’re nearing retirement, or simply looking for a home with less maintenance, paying off your bond early will see you benefit financially when you sell. Rather than having to take out a new bond and accumulate more debt, you will actually make a profit off the sale of your home which can also go into retirement savings.
What Are the Disadvantages of Paying Off Your Bond Early?
There is also the counter-argument that paying off your bond early could cost you in other ways, it all depends on your personal circumstances and priorities. Here is a look at some of the downsides connected to paying off your bond early.
1. You Can Save More by Paying Off Other Debt
Depending on the interest rate, your home loan is often the most cost-effective debt you’re currently paying off, which means you’re better placed paying off something like personal loans, credit cards, or car financing first. This will save you on compound interest rates. However, if your bond is your only debt, then you’re best positioned to pay off your bond earlier with any extra cash.
2. You’re Not Diversifying Your Portfolio
If you decide to invest all extra funds back into your bond, then it’s unlikely you’re investigating other investment options. This means you’re effectively putting ‘all your eggs in one basket’ and not spreading the financial risk across a variety of investments. While there is always a risk associated with an investment, it’s generally encouraged to spread investments across asset classes such as bonds, equities, property, and cash. This is because of the unpredictability of asset performance. In South Africa, residential property is linked to the local housing market and economy, so when the economy is struggling, it’s best to have a more diverse portfolio.
3. You’re Missing Out on the Benefit of Time
While paying off your bond early gets you out of debt quicker, you might also be missing out on time your investment could have been spent accumulating interest elsewhere. Obviously, if you’re investing while also paying off your bond early, then there’s no hassle. However, if you’re only spending your excess cash on your bond, you’re overlooking the fact that your repayment is eroded by inflation. You need to consider your ‘time horizon’ which is the time you have left to invest. If you’ve bought your first house in your 40s, you don’t have time to start investing in retirement after 20 years. It just depends on where you are in your life.
4. You’re Liable for Bond Cancellation
If you pay off your bond early, you’re also liable for bond cancellation fees that could be charged on the additional interest. However, this only applies if you fail to notify your bank 90 days in advance that you’re planning to close your home loan account.
How Do You Pay Off Your Bond Early?
If you’ve weighed up the options and feel that paying off your house early is the route for you, then here are a few ways that you can find that extra cash to put towards your home loan.
Adjust Your Lifestyle
Too often we all live beyond our means, aiming for the bigger car, expensive phone and latest TV. The reality is that we can all live with a lot less, and save a lot more. It’s time to take a real audit of your lifestyle and decide where you can lower your monthly costs
Sell Unnecessary Items
A simple yet easy way to get some extra cash for that bond is to host a garage sale. Go through your home, garage, and cupboards, and take out everything you actually don’t need. Post these online or on your local WhatsApp group – you’ll be surprised by how much money you can actually raise.
Eliminate Other Debt
It’s very easy to get caught in the debt trap, where we pay more for items now that we can only afford at a later stage. When trying to pay off your long-term debt, the quickest way is to re-channel funds previously needed for short-term debt. If you’re driving a bigger car than you need, downsize. Shop around for cheaper insurance quotes. Don’t upgrade your cell phone every two years. We’ve got trapped in a consumerist cycle that needs to be broken.
Room or Flatlet Rental
If you have a potential flatlet on your property – or one that can be converted without too much expense – or you have room to spare, consider hiring out this space. This is a quick way to generate a set amount monthly that you don’t even look at, it simply goes straight towards bond repayment.
Rent Out Your House
You might have bought your dream house but if you want to pay it off quickly, sometimes you need to put that dream on hold. This could mean renting out your new place to tenants while renting a smaller space yourself.
Put Bonuses Towards the Bond
Any extra cash you receive, whether it’s a raise, an annual bonus, or an unexpected inheritance, can go towards paying off your bond. This won’t always be the case - such as a pandemic year where that extra cash might be needed to fund living expenses - but where it can be done, you’re going to reap the benefits.
Just remember that once you’ve paid off your bond early, it’s vital that you’re not tempted to get into further debt by buying a bigger place unnecessarily. If you’re looking to purchase a home within your means, chat to home loan specialists and calculate exactly what you’re likely to be spending to get that dream home.