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MONEY MATTERS

A small increase on a homeowner’s monthly bond repayment can make a big difference in the amount of time it takes to pay off the bond, says Adrian Goslett, CEO of RE/MAX of Southern Africa.
 
“On a 20 year bond of R500 000 at an interest of 11%, the monthly bond repayment will be in the region of R5160. If the homeowner pays just R300 extra into their bond every month, they will save over R144 000 and cut the term of their bond by almost four years,” says Goslett. “This may just be a small step, but it can fast-track a homeowners path to financial freedom.”
 
Goslett adds that if a homeowner is financially stretched to the limit and is not in a position to pay additional money into their bond, they could rather focus on finding ways to reduce the interest payable over the term of the bond. In some cases switching from one financial institution to another can result in a reduction in interest rate. He notes that on a bond of R1 million, a reduction of as little as 0.5% on the interest rate can result in a saving of over R76 000 over the term of a 20 year home loan. “However,” says Goslett, “homeowners that do consider this option could face paying bond cancellation and penalty fees, which will severely reduce any benefit or profit achieved from obtaining the lower rate.”
 
According to Goslett, even if a homeowner is able to obtain a lower interest rate through switching banks or a general interest rate cut, they should still keep their monthly repayments at the same amount. Banks will usually reduce monthly payments automatically according to the prime interest rates fluctuation, however, homeowners can have the repayment stabilised.  Maintaining the original bond repayment at the reduced interest rate will mean that they are getting the benefit of paying extra into their home loan every month, without having to find additional money in the budget.
 
Goslett says that homeowners can make further savings on their home loan interest if they have an access bond where they can transfer any extra lump sums of money into the loan account, such as an annual bonus, refund from SARS or a portion of their salary, while still retaining access to it. The interest payable on the home loan account is calculated daily based on the outstanding balance. This means that if a homeowner has access to the account and is able to transfer cash into the account when they have it, they can reduce the amount of daily interest charged for the period that they money is in the account.  This is a good solution as even if the money is only in the account for a short while until the homeowner requires it and needs to withdraw it again, the interest over that period will still be less. “The savings on the daily interest amount might seem small, but it will add up over the term of the loan,” says Goslett.
 
Finding ways to pay off a home loan faster or reducing the amount of interest paid over the term of the loan, can be massive steps towards realising a greater return on the investment made. “Even in tough financial times when budgets are tight, homeowners can still make significant savings with relatively insignificant changes to their monthly budget. By proactively using simple saving strategies, homeowners can effectively speed up their journey to financial freedom,” Goslett concludes.


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