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Save yourself 10 years of bond payments

Debt

Save yourself 10 years of bond payments

Reading Time: 2 minutes

Statistically, the largest debt that an average middle-class household will ever owe is the mortgage 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)

Example:

  • 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.

Question:

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.

Comments

Older comments

    Thanks for the enlightenment guys, great work. Could you kindly do the same scenario BUT this time base it on the payment period of 5years? How will the monthly repayments change? Thanks

    Zonotho says:

    We agree! Really amazing. The power of compund interest is he 8th wonder of the world! Thanks Israel

    Kolie Bana says:

    Then how do you go about assisting a person who is interested in this saving. Regards

    Amazing how a little extra can save so much time

    Thanks for such a great article.

    Wow Benjamin, I like that thinking. I was thinking of applying that logic towards my next car.

    Zonotho says:

    This is a very interesting take – one of our contributors is working on a post on renting vs buying or buying later. Keep an eye on our page for that post!

    Wow! Very important piece of information

    wow very useful information! eye opening.

    Great article! Thank you so much! Here’s another suggestion I would like to bring to the table. If you took that original R9,587 and put it in a fixed term savings account that earns 8.5% interest per year (FNB’s 60 month fixed deposit can get you this), and used the remaining R3,533 to rent yourself a modest living space in the meantime, the picture looks even better! You will have saved up the R1,000,000 for the house in just 6.5 years! And I’m sure if you tell the owner you want to buy the house cash, he’ll be willing to give you a discount. In this way you’ll end up paying less than R1,000,000 for the same house that would have cost you a total of R1,574,400 on the 10 year plan (including interest) or R2,300,880 on the 20 year plan. There are some other factors to take into account. Inflation is one, but I guess your paycheck will increase with inflation as will your monthly contributions, so it more-or-less cancels out. The other is the variation of property prices, which depend largely on the area where you buy. But this example still serves to show you the great power of compound interest. Like Dave Ramsey says, “If you live like no one else now, later you can love like no one else!”

    Fantastic article! Just to add, a person would also have to read the terms of their mortgage carefully. some financial institutions do not offset any additional repayment against the principal amount of the loan , but rather hold that money in a suspense account to draw from in case of default. Before doubling up on repayments , just make sure your bank will use that money to lower the borrowed amount.

    Great read. Thanks for the information

    Zonotho says:

    Thank you Lucia!

    Zonotho says:

    #MakeFinanceSimple �

    Very simple and informative!

    Nice and simple to comprehend

    Zonotho says:

    Wow! Incredible!

    Zonotho says:

    Hi Rowly We’re very glad you enjoyed the read! Thanks for being considerate about the other readers… To answer you: in this example we gave, If you were to pay double the installment, you would pay off that home in just under 6 years! So effectively you would pay it off FASTER than you would pay off a normal CAR PAYMENT!

    Nice article. Always used that thinking and paid extra into my mortgage bonds. It works. Now I have 3 properties.

    This is a good read, the language is not to finiancial for us normal folk. So if I was to pay double the installment, how many years of payments will I save? I can do the calc, but I think the other readers would like to see the power of large early repayments. Thanks guys

    Zonotho says:

    Hi Masala. Thank you for the comment, we’re glad you liked the post! Essentially the question you’re asking is whether it is a better strategy to focus on debt cancellation or on investing. Thats a really good question and often depends on an individual’s own financial situation. So by law only accredited financial advisors can give you advice specific to you. We are not financial advisors, we are simply here to help you understand the financial world better! It is generally considered good practice to prioritise aggressively paying off high interest short term debt above investing for the long term. (By high interest debt, we refer to credit card debt, revolving loans etc which can charge interest well above 20%pa!) As for shortening your mortgage term vs investing the money, that would be better answered by your fiancial advisor as it would depend on your personal finaincial position

    Zonotho says:

    It is an absolute pleasure!

    Thanks Benjamin for such information. I have been asking myself how on earth I can payoff my bond in 10 years. I used to think its impossible. There is one thing I want to ask, is it best to save on my bond or to have an investment. I see on my investments say I get 2% interest and on my bond I am charged 10.5% interest…Then what’s the point of having an investment account. Please clarify if my reasoning makes sense and if possible can you publish an article about that. There is some truth banks do not want to tell us….

Benjamin is a corporate actuary, currently working at a major financial services firm. He has experience in wealth and investment products. Benjamin is very passionate about teaching and empowering minds.

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