Purchasing property is one of the most significant and costly financial decisions you will ever make, especially if it’s your first home, but applying a few financial tips can allow you to pay your bond off quickly - benefiting your future financial security and resulting in a great investment at a reduced cost.
Purchasing property is one of the most significant and costly financial decisions you will ever make, especially if it’s your first home, but applying a few financial tips can allow you to pay your bond off quickly, says Barker.This is according to Steven Barker, Head of Home Loans at Standard Bank, who says the point of buying property is not only to meet a basic human need for shelter, but can be seen as an asset that appreciates over time and is regarded as an integral part of a comprehensive retirement portfolio.
“That said, not many people are aware that they can pay their bond off a lot quicker than the normal agreed-upon period and save significantly if their approach to the loan is applied with discipline,” says Barker.
1. All the small things
First off, Barker says it is advisable to reduce - or completely cut - any short-term debt and retail accounts that are a drain on your budget before taking up a home loan.
It’s the small things that add up - for example, not purchasing that cup of coffee on your way to work at R15 could, over 50 weeks, mean an additional R3 750 freed up to put into your bond a year.
Similarly, cutting out that R500 monthly spend on retail accounts that are not necessities adds up to an additional R 6000 in savings a year.
These two simple savings tips could mean around R9 750 extra per year is freed up to be paid into your bond, which leads to months shaved off your bond term.
For example, say you take a loan for R 750 000 at an interest rate of 10% per annum over 240 months - or 20 years, with the assumption that the interest rate remains at 10% for the entire loan term. By making an additional payment of R500 to your monthly minimum instalment, you can bring your loan term down by 40 months.
2. Less is more
Barker says it is best to avoid taking a home loan that matches the maximum you have allowed in your budget for repayment.
Having additional cash in your budget means - should circumstances allow - you could pay a few hundred rands more over and above your minimum monthly instalments. This, again, translates into paying your bond off over a shorter term, paying less in interest and affording you more time to save for retirement.
Work out your home loan instalments here.
3. Do the math
Before applying for a home loan, Barker says you must have a clear idea of what you can afford in terms of monthly bond instalments and expenses.For first-time homeowners in particular, affordability is a key consideration when attempting to pay your bond off faster.
Before applying for a home loan, you must have a clear idea of what you can afford in terms of monthly bond instalments and expenses. This will help you determine if you can afford the payments and the costs associated with owning a home, such as water and electricity, rates and taxes, maintenance, insurance or other unforeseeable expenses that can arise.
Once you know what your monthly spend is going to be like, check if you will have a couple of hundred rands to spare.
“If the monthly repayments are more than what you have budgeted for, the price of the property is beyond your means. Look for a home within a lower price range to avoid finding yourself in a position where you don’t have money left after paying your bond, or money to save,” says Barker.
Can you afford it? Do the calculations here.
4. Save for a deposit
Baker says another way to bring the monthly repayment down - so that you can afford to put in extra - is by saving for a deposit before you actually make a home purchase.
Your deposit should also be at least 10% of the purchase price, and 20% for properties of R2 million and more, so he says saving for it should start as soon as you start earning an income.
“This may help you get a lower interest rate and also decrease your monthly repayments, both decreasing the cost of the loan overall and freeing up more to contribute to the loan,” says Barker.
“Just remember that it is best to ensure that your deposit is made up from savings - not from additional loans. This would mean you have to pay off that loan at the same time you are paying off the home loan, putting pressure on your monthly expenses.”
Barker says buying a home is a great achievement, and you need to approach your investment with caution in order to realise other financial goals you would like to achieve.
Also read, Get your bond down faster with lump sum deposits.
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