select
|

What does paying a little extra into your home loan get you?

It’s been a long, tough year and as the festive season approaches, one might be tempted to think that loosening your purse strings over this period may be the best way to reward yourself for surviving the challenges of 2012.A different approach however, would be far more rewarding and is the best gift you could give yourself.

South African homeowners have been under financial strain over the past few years, as is evident in the sticky high debt to income ratio.

In this context, the December period is a good time to start putting in place a financial plan for 2013, rather than spending money now for short-term feel-good moments, which can place you under pressure in the New Year.
For those receiving bonuses or 13th cheques in December, some of the extra money should be used to reduce your debt, particularly large commitments such as home loans. This principle is particularly important when it comes to home loans as a mortgage is probably the single biggest debt the average person will incur, and it stretches over decades.

Even a few hundred rand a month extra paid into your home loan can bring down the interest burden and the term of the loan significantly, and save you hundreds of rands in the long term. You end up with less of a financial burden at the end of every month.

“Payment holidays” that some see as an option for extra cash at this time of the year is not a good financial decision. Remember that a monthly payment is required on your home loan. Taking a holiday from your payment will not benefit you in the long run, as it will cost you more over the long term.

But what about having some fun during the holidays?

Fun with a plan is the best option as this keeps you responsible and ensures that the fun is not short-lived with negative long-term effects. The challenge of the summer holidays is that most people get paid earlier than usual in December and this makes managing your money until the end of January a challenge. Most of us are used to managing through about four weeks, not six or seven.

In addition, a bonus or 13th cheque provides a false sense of increased earnings which makes us feel that we can spend a bit more without necessarily watching the budget.

The problem, of course, is that your month-end payment commitments for December are still there. And January has more expenses than most other months, because of school fees, stationary and uniforms, and too often, we also have a financial hangover to cope with from spending more than we should have in December.

Planning ahead can help avoid spending the rest of 2013 trying to recover from a few moments of madness in December.

What does paying a little extra into your home loan get you?

Paying a little extra into your home loan on a monthly basis or one off, can save you hundreds of thousands of rands in interest and will reduce your bond term. Below is a table demonstrating the benefits of paying extra into your home loan using an example.





Graph: Prepayment loan curve vs Normal loan curve

The difference between paying R1.1M for a R700 000 loan or R1.5M (Interest cost + capital)


The above graph shows the benefit of paying extra money into a home loan. The example used is a loan taken in April 2008 for R700 000 at an interest rate of 15% per annum, over 240 months (20 years).

The blue line represents the customer who chooses to keep payment at the same instalment level of R9217.53 each month, despite reductions in the interest rate over this period. The bond term reduces by 10.5 years (assuming that the lending rate remains at 8.5% from July 2012 until October 2018).

The red line represents a customer who paid the minimum monthly instalment only over the 20-year term (assumes that the rate remains at 8.5% from July 2012 until April 2028).

*Steven Barker, Standard Bank’s head of home loans



  Comment on this Article

  Please login to post comments

Post to my facebook wall
  
2000
Characters remaining


    Latest Property News
    • 23 Feb 2018
      RE/MAX Property Associates’ Table View Office, which services property buyers and sellers along the Table Bay coastline and surrounds, has recently sold a home in Woodbridge Island for R11 million – the highest price paid for any home in the sought-after security complex.
    • 23 Feb 2018
      Choosing to invest in an overseas property can be daunting. But as more and more investors recognise the value of a diversified portfolio that includes property outside of their own country of residence, international property investment is growing in popularity.
    • 23 Feb 2018
      The positive change in South Africa’s political landscape is paving the way for an upswing in the local property market.
    • 22 Feb 2018
      An excellent credit score is one of the most priceless assets a potential home buyer can have. This tool has the power to secure favorable mortgage and refinancing rate, influencing everything from the size of the loan repayment to the interest rate on the home loan.
    • 22 Feb 2018
      What do you do if you love your home’s location and the area, but the home no longer fits your growing family’s needs? Do you stay and renovate your existing home or find a home that meets your developing criteria?
    • 22 Feb 2018
      While every owner wants to sell their property at the best possible price, overpricing a home can be the kiss of death for a sale.
    • 21 Feb 2018
      Given the hand they were dealt, government has performed a delicate balancing act which it is hoped will serve to reignite confidence in investment in South Africa, regain our global credibility and satisfy the credit ratings agencies, says Dr Andrew Golding, chief executive of the Pam Golding Property group.
    • 21 Feb 2018
      The real estate mantra, ‘location, location, location’ remains a strong market influence regardless of the prevailing economy, with suburbs like Rondebosch enjoying the buffering benefit of being ideally situated.
        
    X
    Subscribe to the MyProperty Newsletter

    Name  
    Last Name  
    Email Address  
    Email Frequency
    select
    X
    Share this Page

       
    For Sale Property
    Rental Property
    More Options
    About
    Connect with us
    FEEDBACK