How do you feel about your home loan? Are you comfortable with
what you owe? Do you simply look upon the monthly instalments
as the equivalent of paying rent? Do you ever think seriously
about owning your own home without any encumbrances and the freedom
of knowing that you do not have to pay thousands of Rands each
month just on interest?
Reducing your Mortgage Debt
One of the most profitable decisions you can take as a home owner
is to pay an additional amount each month on your loan, no matter
how small it may be. Your bank will stipulate a required minimum
monthly instalment which will repay the bond over twenty years.
You need to make provision for an extra amount each month that
will effectively reduce the capital debt with each instalment.
If necessary sign a new debit order at your bank against your
current account, making allowance for whatever extra amount you
can afford. A debit order is an effective form of selfdiscipline
- you do not have to motivate yourself each month to make that
You can, at a later date, revert to the original instalment if
your financial situation should deteriorate. At least the extra
payments you made in the good times will stand to the credit of
the loan account. By that time, if times are really hard, you
may be able to negotiate a reduced instalment well below the original
amount as a result of the lesser amount owing on the capital sum.
The Effects of Paying More
There are many other benefits deriving from accelerated payments.
Your equity (the difference between the net resale value and the
outstanding bond balance) in the property will increase at a much
faster rate, and you will soon create some real financial breathing
space which may be invaluable in a time of crisis. This cushion
of flexibility during hard times can be the difference between
surviving and complete financial collapse leading even to personal
Accelerated payments are a form of tax-saving - you are effectively
investing your money at the current bond rate tax-free, while
anyone putting the same amount on a fixed deposit, for example,
will be earning up to 5% less with tax being payable on the interest
Banks generally no longer apply the penalties they used to for
paying off your loan earlier than the regulated period and you
should check this out first. Read your mortgage loan agreement
carefully to see if your bank has reserved the right to add penalty
interest for accelerated payments. Those who live on credit pay
so much more later for pleasures long gone and forgotten. Others
who pay more now, pave the way for happier times to come, and
peace of mind that can only be envied by those who do not have
* Earlier monthly repayments
A large number of home loan account holders pay their monthly
payment on the last day of the month. Paying it when you get paid
(say 26th) will result in interest savings.
* Once off payments
Should you receive money as a bonus you may wish to pay some or
all of it into your home loan. By paying for example, R10,000
into a R100,000 mortgage a few months after your repayments started
- would pay off your home loan in 12 years instead of 20 years
- assuming an a interest rate of 18%.
Dangers of Incurring Excess Credit
Avoid the temptation to access your equity once you have created
it. Months of painstaking saving can be blown away in a moment
of rash spending. Especially avoid being taken in by those occasional
letters some banks send out, telling you the credit amount you
can take as a re- advance coupled with a dazzling array of ways
in which you can literally waste it.
It has been said that the average South African consumer can easily
be identified. He is a man who spends money he hasn’t got, to
buy things he doesn’t need, to impress people he doesn’t like!
Some people unfortunately just cannot resist using any credit
that may be available without anticipating the day when the tap
will simply dry up and there is quite simply nothing more to access.
By that time the consumer will have unwittingly reached the end
of the line in more ways than one. His debts will be astronomical,
and his monthly commitments will have become almost intolerable.
Many a poor soul has faced this El Nino of personal economics
too late to conserve any water for the drought ahead. Worse still,
it is at such times that the good days may suddenly come to an
end, leaving the victim to face crises that cannot be resolved.
So often it is just at that time when there is no mare to borrow,
that interest rates start rising and debts are called up.
Make that Extra Effort to Create Capital
The wisdom in making a supreme effort to live within your means
cannot be overstated. It can often be achieved just by cutting
out those little indulgences we allow ourselves. That weekly trip
to a local restaurant, those extra beers for the weekend, those
weekends away on package deals at up-market resorts - say “No!
“ to most of them and you will reduce your loan debt far more
quickly and effectively than you may imagine.
An exercise of self-discipline upfront can soon become the norm
and you will not even notice that extra amount you are paying
each month. You can build your equity faster and ensure that you
will not be stung when crises do come, such as the global financial
disruptions that sent interest rates through the roof late last
year. The discipline of not reducing your monthly instalment,
should interest rates fall, will help even more. Take a few years
off your loan and add those years to your life!
Click Here to go to our Increased Instalment
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