Please note that you are using an outdated version of Internet Explorer which is not compatible with some elements of the site. We strongly urge you to update to a newer version for optimal browsing experience.

Why paying extra into your home loan is the best investment

29 Jul 2019

In honour of Savings Month, South African homeowners need to become more aware going forward of the benefits of saving by paying an additional amount off their home loan every month.

Botha says the amount of interest you will save by paying your home loan off early will in most cases far outweigh the returns you could hope to make by putting your savings in the bank. Calculate your savings here.

“The latest Old Mutual Savings and Investment Monitor (July 2019) shows that only 25% of homeowners are currently paying more than the minimum bond instalment every month, while 5% occasionally add a lump sum such as a tax refund or a bonus cheque to their minimum monthly repayment,” says Rudi Botha, CEO of leading bond originator BetterBond.

“And yet, one of the best investments homeowners can make is to use any additional money they have available to shorten the repayment period of existing debts, and especially their home loans.”

Botha says the reason is that the amount of interest you will save by paying your home loan off early will in most cases far outweigh the returns you could hope to make by putting your savings in the bank. “What is more, these returns will be entirely tax free, and if you have an access bond, your money will be easily available if you should need it in an emergency.”

Botha says the latest BetterBond statistics indicate that the average home loan granted is now around R975 000, which means that at the current prime rate of 10%, the average minimum monthly home loan repayment is about R9 600. “And, thanks to the way compound interest works, the homeowner who pays only this minimum amount each month will pay more than R1.3 million in interest over the lifespan of a 20-year home loan."

“On the other hand, the homeowner who pays just 10% more than the minimum each month, or an additional R960 per month in the example above, will pay off the home loan in 15 years and four months - and save some R360 000 worth of interest in the process.”

That represents a return of more than 100% on the additional R177 000 invested in the home loan, he notes. “And there really aren’t many other savings options these days that can guarantee you that kind of return - while also delivering a fully-paid-for property,” says Botha.

“It is also worth remembering that the property itself will appreciate in value while you are paying it off, meaning that you stand to make a further return on your overall investment if you sell it.”

However, Botha says this begs the question of whether homeowners and other consumers currently have any money available to allocate to savings of any kind. “According to the Old Mutual report, savings as percentage of household expenditure currently averages 16%, up from 14% last year, and the average rand amount allocated to savings is R2 260.”

“But the survey also found that savings priorities are funeral expenses, retirement, emergency/rainy-day money and children’s education, for those with dependent children. Accordingly, the main savings vehicles currently are formal funeral, education, retirement and life insurance policies, as well as accident and disability insurance, and stokvels or savings clubs - none of which are likely to deliver the same sort of returns as putting your savings into your home loan account,” says Botha.

“Consequently, we would urge those homeowners who are currently still paying off a home loan to seriously consider re-allocating at least some of their savings to paying an additional amount each month.”

Work out how much additional payments will save you here.

Also read: How much will the 0.25% rate cut save you on your home loan?

Print Print
Top Articles
With prices from under R3m, these homes in upmarket Pretoria East estates offer convenient family living. From The Ridge to The Meadows and more, take a peek…

Luxury home sellers in the Cape Winelands are accepting offers which they may have disregarded a few months ago, making now a great time for buyers seeking value.

From the North Coast to Hillcrest, Pinetown and more, these areas attract many buyers and tenants with property options for any pocket. Also see emerging hotspots…

Loading

Your browser is out of date!

It looks like you are using an outdated version of Internet Explorer.

If you are using Internet Explorer 8 or higher, please verify that your Internet Explorer compatibility view settings are not enabled.

For the best browsing experience, update to the latest Version of Internet Explorer or try out Google Chrome or Mozilla Firefox.


Please contact our Property24 Support Team for further assistance. Tel. +27 (0)861 111 724