With savings rates at rock-bottom, overpaying on your bond is often a no-brainer. And for many it is - there’s the potential to save a huge amount, even if you can afford an extra R100 a month.
“If you're thinking of using newly arriving extra income, such as a pay rise, to overpay your mortgage, build up an emergency fund first,” says Vermaak.“If you get it right, paying more into your bond can be a huge cash boost,” says Charlotte Vermaak, principal of Chas Everitt Nelson Mandela Bay.
“You’ll eat into the debt you've built up from buying a home, meaning you pay it off quicker, you don't pay interest on the amount you have paid into your bond, and the money you'd save on interest often beats the returns possible by putting it in savings, given savings rates are currently so pitiful.”
So, what do homeowners stand to gain financially?
Based on a home loan of R1 million at an interest rate of 11.7%, depending on how much you can afford, the potential benefits you can reap vary. For example:
| Additional payment | Total saving on interest | Term reduction |
| R100 | R67 522.68 | 8 months |
| R250 | R156 596.83 | 19 months |
| R500 | R279 981.30 | 35 months |
Ensure you have sufficient emergency funds
“Although it’s great to pay more into your bond and reduce the term and what you pay in interest, budgeting logic says it's always worthwhile having a cash emergency fund,” says Vermaak.
“Paying extra into your home loan means the cash is gone, so if you face an emergency like a leaking roof or redundancy - not new shoes, and you don’t have spare cash, you could be forced to borrow again."
Vermaak says this means it's always a good idea to keep an emergency fund in a good savings account - three to six months' worth of cash is a good guide, enough to live on if you lost your job, for example.
“If you're thinking of using newly arriving extra income, such as a pay rise, to overpay your mortgage, build up an emergency fund first,” says Vermaak.
“This applies even if the calculator shows you'd be better off overpaying your mortgage. It's what's known as 'a premium for liquidity'. In other words, it's sacrificing some interest for easy access to cash when needed.”
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