The interest rate is expected to remain steady and then eventually start coming down, and while in this cycle, homeowners should take the opportunity to pay down their home loans.
This means they should keep paying the same bond instalment they are paying now, even when the minimum amount required decreases.
After all, if you can afford your monthly bond instalment at the peak of the rate hike cycle – which is what you are paying now, then you can keep your monthly repayment the same after any rate cuts.”
This approach, says Alan Rubin, chief operating officer at ooba Home Loans, can achieve significant long-term interest savings, as well as reduce your home loan repayment period term.
“By applying this strategy, you can, in fact, cut your home loan repayment period by years, in some cases.”
There are three ways to do this, he says:
1. Pay more than the minimum
Ooba data shows that the average purchase price of a home in South Africa sits at R1,426,656. At the current interest rate of 11,75%, the minimum monthly repayment of a property of this price on a 20-year bond would be R15,461.
“In the present high-interest environment, envisioning an interest rate of 10% may sound like wishful thinking, but it’s worth noting that we were at 9,75% in August 2022, suggesting that a rate drop to 10% is not beyond the future realms of possibility.
“If prime returns to 10%, and if you were to keep your monthly instalment at R15,461 – thereby overpaying the minimum repayment by R1,693 – you would be able to reduce your loan term to 14,71 years; effectively paying off a 20-year bond more than five years earlier.”
In addition, you would also reduce your total loan repayment amount by a “whopping” R981,015 – almost a million rand in savings.
The investment benefit of this approach, Rubin explains, becomes more apparent when applying the same approach to a 30-year loan term. Keeping the higher monthly instalment on your 30-year bond – R14,401 in this instance – at prime over 30 years and at the lower 10% interest rate, the result would be even more impressive.
“The loan term is reduced to 17,53 years, meaning that it can be paid off in almost half the expected time. Here, the total loan amount repaid is reduced by over R2 million (R 2,154,257 to be exact).”
2. Don’t discount once-off overpayments
Homebuyers who are unable to pay more than the minimum repayment amount every month can still reduce their total loan amount and pay it off faster by making once-off or occasional overpayments.
“These are a great investment in the same way as having a deposit for your home purchase is. An overpayment is an extra lump-sum repayment on your bond over and above your required minimum monthly instalment.”
He explains further: “It is hugely advantageous to put any unexpected financial windfall – for example, end-of-year bonus, a tax rebate or an inheritance – towards your bond. A R10,000 once-off overpayment on a 20-year bond of R1,426,656 at the current prime rate of 11.75%, will reduce your total loan amount by R91,081. On a 30-year term, the benefit of that R10,000 overpayment would equate to R292,795 in savings.”
While the numbers speak for themselves, the additional benefits of paying higher monthly instalments and/or once-off overpayments are as follows:
Reduce interest payments: By making additional payments, you can effectively
Build equity faster: Paying off your bond earlier allows you to build equity in your home at a quicker pace. Building equity can provide financial security and open up opportunities for future investments.
Potential to refinance: If you’ve reduced your loan balance, you may become eligible for better refinancing options at lower interest rates, further saving you money. You may also have the opportunity to consolidate other debt under your more favourable home loan rate.
“Ultimately, paying your bond off sooner lowers your financial stress and increases your financial freedom, Rubin says.
“Once the outstanding balance of your bond and associated interest is reduced, you’ll have the option to redirect funds towards other investments, retirement savings, or even a home upgrade.”
You can even use the money to invest in a rental property.