Paying your bond faster is very important. Statistically, the largest debt that an average middle-class household will ever owe is the home loan (or bond) on their home. The monthly payments can become a huge burden, especially when unfortunate events occur (i.e. retrenchment, disability or death of a breadwinner).
Many households have quite a long time before the end of their bond terms. It’s therefore important to always consider reducing this debt as much as possible.
Paying off that bond sooner may not be as impossible as you thought!
Related: Invest or pay off your bond?
Let me give you a simple example (by ‘simple’ I mean that I will not include levies, insurance etc. that you would have to pay as well, and I will assume that the bank charges a fixed interest rate instead of a floating rate – but the principle I am explaining still firmly holds)
- Say you take out a loan of R1m to buy your dream home
- The bank charges you interest of 10.5%pa.
- You do not pay a deposit and you have 20 years to pay this off
According to this; you would expect to be paying approximately R 9,587 at the start of every month for 20 years before you can breathe a sigh of relief.
How much would you have to pay a month to pay off this home in only 10 years (that is HALF the time)?
Most of the people I’ve surveyed say that you would have to pay in double your current instalments (That is R 9,587 * 2 = R 19, 175).
BUT I cannot stress how wrong this is!
Actually, to pay it off in 10 years’ time you would have to pay R 13,120. Yes, that is R 3,533 more to your original R 9,587! Just imagine that only R3,500 bucks extra could save you a WHOLE 10 years of payments!
You may ask yourself. “Well, that’s great! But I don’t have an extra R 3500 a month”. To you I say:
- an extra R1,085 would save you 5 years,
- R556 extra would save you 3 years
The point is, every little bit counts (quite possibly more than you think). So if you find yourself with extra money, instead of buying that new contract phone, save yourself some years of paying off a loan, and take that step closer to financial freedom. Try the Zonotho loan calculator to see what an extra payment would do to your bond.
This article has been updated to reflect the latest available information in 2020.