You’re about to learn how to reduce the interest paid on your bond and save more than R100k over the term of the loan.
Jason Bagley (visit his website) asks a question which I believe could help many South African homeowners save money.
He posted a question (here), asking whether it would be better to take out a 30 year homeloan but repay the loan based on what a 20 year loan would cost. Wouldn’t you save more?
Firstly, Jason is already on the right track here. The first step to building personal wealth is to reduce your debt.
In many instances we’re more interested in securing a homeloan for our “dream home”, but we pay no mind to the terms of the mortgage. I’m referring to the interest rate offered on your new (or existing) home loan.
Your home loan is most probably your biggest financial commitment, and it’s easy to understand that on an average sized mortgage of R500 000 the interest rate plays a huge roll in determining how much you’ll actually end up paying.
**With that in mind, let’s quickly look at whether a 30 year term or a 20 year is best, and then I’ll answer the question above.
– Or Just Skip to the Conclusion now.
The interest rate you’ll be offered is based on the risk the bank is taking in granting you the mortgage.
The lower the risk (the more like you are to pay off the bond) the better your interest rate will be. And the higher the risk, the higher the rate.
If you apply for a long 30-year term you’ll more likely get a higher interest rate than if you take your bond over 20 years.
So the shorter the term – the more likely you are to get a lower rate. Remember, the term is not the only factor affecting your interest rate.
**Now lets look at how much you’ll SAVE if you apply for a 30-year term (despite the higher rate) and repay the loan based on what a 20 year loan would cost:
Consider this scenario:
Our bond consultants submit your application to the various banks and you have the choice of accepting a bond of R500,000 over 30 years at 11.5%; or a bond of R500,000 over 20 years at 11%.
Bond Terms: R500 000 over 30 years at 11.5%
Repayment: R4,951 per month
Total cost over 30 years: R1,782,524 (R1.78mil)
Bond Terms: R500 000 over 20 years at 11%
Repayment: R5,160 per month
Total cost over 20 years: R1,238,625 (R1.23mil)
NOTE: Option A is R550 000 more expensive
If you choose Option A and repay the loan based on what a 20 year loan would cost at 11.5% you would have to pay R381 extra per month (R5,332pm), but then your total repayment would be R1,279,715 (R1.27mil) – still more than Option B.
With Option A, you would actually have to pay R448 extra per month (R5,399pm) to match the total repayment of Option B.
The advantage with Option A is that you have the choice of paying extra every month to reduce the interest charges. And if you are struggling one month you can simply pay the minimum amount of R4,951 and not R5,399.
But, you’ll make a bigger saving if you choose Option B and pay an extra R239pm to match the R5,399 you would have paid with Option A. In this case your total repayment will only be R1,117,863 (R1.11mil)
Option A + R0 extra per month = R1.78mil
Option B + R239pm = R1.11mil
This is an example of how a slightly better interest rate and paying extra into your bond can end up saving you more than R600,000 over the term on your mortgage.
NOTE – this is very important:
Since every Home Loan application is unique I suggest you consult one of our Mortgage Specialists before applying.
Click Here and complete the online bond application form. A Bond Consultant will contact you with more information.