Is it better to save R1000 into my home loan to pay it off quicker or to pay it into a high-interest savings account?
In the struggle to become financially free and debt free we are often torn between investing in our future and paying off our existing debts.
A common question among homeowners is whether saving money into their bonds is better than investing in a savings account.
To become financially free and debt free you need to become money wise. Therefore, when you’re deciding whether to invest your extra money into your mortgage or savings account you need to consider the interest rate, the returns and the costs.
The Rate, Returns and Costs
The returns – or interest – you’ll earn on a savings account are generally calculated between 5%-10% annually. That’s between R50-R100 in interest earning per year for every R1 000 you save.
The cost savings you’ll make by investing R1 000 into your bond is much greater than the interest earned on a savings account. The interest charged on your home loan is usually 0.5%-1.5% below the current prime interest rate.
Paying R1 000 extra into a R1mil bond every month would save you about R350 000 over the full term. So you’re actually getting a R350k discount on the what the property cost you over
And, because your property value will grow over the long term, by the time you’ve settled your bond you’ll have a huge asset under your name.
Two Birds, One Stone
Saving money into your bond has a dual effect of paying off your debt while also allowing you to invest in your future.