Pay off your home loan before your retire

It is becoming increasingly important for those approaching retirement to ensure that their home will be bond or rent-free.

That’s the word from Tjaart van der Walt, CEO of the RealNet estate agency group, who notes: “Although the rate of inflation is quite low at present, the cost of living continues to rise year after year, with everything from food to health services becoming more expensive, leaving those on a fixed incomes no choice but to keep lowering their standard of living.

“Retirees may of course experience some relief whenever the Reserve Bank raises interest rates and they earn more from their savings, but this will be negated if they are still paying off a home loan.

“And in those circumstances, even selling their homes and opting to rent will only be of limited benefit, because they would undoubtedly have to face a rental increase each ensuing year – and possibly more often if interest rates were to rise rapidly as they did in 1998 and again in 2008.”

However, retirees who own a fully paid-for property will not have the worth of their pensions or annuities eroded by increases in the home loan rate or in rent, and will have some leeway in terms of inflation, in that they will probably be able to free up some money if necessary by “trading down” to a smaller property that is also fully paid-for.

Meanwhile, says Van der Walt, those for whom retirement is still some way off should be putting spare cash into their home loan account, in order to reduce the capital and pay the loan off faster.

“This may be difficult, considering that more than 75% of the average household income is currently committed to debt repayment, but even a small additional amount paid each month can reduce the home loan repayment period by years – and also save the owner thousands of rands in interest.

“On a bond of R800 000, for example, the current minimum monthly repayment at the base home loan interest rate of 10,5 percent is R7987. But by paying just R300 more a month, homeowners can shorten their bond term by more than two years – and save more than R140 000 in interest.”

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