Buyer

Author : Homeloans SA

Paying Off Your Home Loan Sooner

20 years is a very long time. 30 years is even longer. In fact, 30 years is half of our adult lives… that is if we do manage to live to the ripe old age of 80. Many homeowners will be spending that entire time repaying their single largest debt: The Home Loan.

It is this daunting prospect that – some years ago – ignited an interest amongst homeowners of finding ways and means to reduce the terms of their home loans without taking the more drastic step of re-mortgaging.

The financial service providers were quick to come up with an array of products to purportedly help these homeowners achieve a reduction of their repayment terms. However, as time went by, most of these have proven to be less effective than simply paying more.

We will take a look at two different pay-more strategies that can be used to reduce your home loan term, followed by a comparison to see which of the two strategies would be the best to achieve an optimum term-reduction of five years, ten years and fifteen years respectively.

For the purpose of this article, we used a 30 year, R 1 million mortgage, at an interest rate of 14%. This translates into a principal amount of R 1,000,000 and R 3,265,538.30 in interest if the loan is repaid over the full 30-year term.

Strategy 1: Pay More Every Month

The first strategy is to pay an extra amount against your home loan every month.

The Less 5 Year Target

To reduce your term to 25 years, you will need to pay R 199.00 extra every month. A term reduction of 5 years results in a saving of R 673,565.20 in interest.

The Less 10 Year Target

To reduce your term to 20 years, your will need to pay an additional R 600.00 per month. A term reduction of 10 yeas results in a saving of R 1,295,365 in interest.

The Less 15 Year Target

To reduce your term to 15 years, you will need to pay R 5,000.00 extra on your home loan every month. A term reduction of 15 years results in a saving of R 2,412,329.00 in interest.

Strategy 2: Pay your Home Loan an Annual Birthday Bonus

The second strategy is to make an additional lump sum payment as an annual birthday bonus against your home loan, starting when you pay your very first instalment.

The Less 5 Year Target

If you pay R 2,200 as a lump sum into your home loan account every year, you will repay your home loan within 25 years and save R 673,009.00 in interest.

The Less 10 Year Target

If you pay R 6,750 as a lump sum into your home loan account every year, you will repay your home loan within 20 years and save R 1,303,252.00 in interest.

The Less 15 Year Target

If you pay R 16,800 as a lump sum into your home loan account every year, you will repay your home loan within 15 years and save R 1,894,396.00 in interest.

So, Which Is The Better Of The Two Strategies?

The Less 5 Year Target

Strategy 1 costs R188.04 more per year than Strategy 2.
Strategy 1 delivers R 556 greater savings on interest than Strategy 2.

The low down: Considering that Strategy 1’s R 566.00 greater saving in interest rate will cost you R 4,701 over the 25 years, the outright winner here is Strategy 2.

The Less 10 Year Target

Strategy 1 costs 450.00 more per year than Strategy 2.
Strategy 1 delivers R 7,887 less savings on interest than Strategy 2.

The low down: Considering that Strategy 1’s saving in interest rate is R 7,887 lower and that it will cost you R9,000 more than Strategy 2, the outright winner here is Strategy 2.

The Less 15 Year Target

Strategy 1 costs 43,200 more per year than Strategy 2.
Strategy 1 delivers R 517,933 greater savings on interest than Strategy 2.

The low down: Considering that Strategy 1’s R 517,933 greater saving in interest rate will cost you R 648,000 more over the 15 years than Strategy 2, the outright winner here is Strategy 2.

To conclude

As a strategy, lump sum payments could be more effective than paying bits and pieces every month. If you do have some extra money at the end of any given month, by all means, add this to your mortgage too. It is bound to offer a better return than that of your savings- or current account.

Should you want to know how making lump sum payments will affect the interest and the term of your particular home loan, contact your mortgage originator for assistance.