What does it take to pay off your home loan sooner ?
Category Advice
In this advice column, Nico-Louis Minnie from Liberty Investments answers a question from a reader who wants to expedite paying off his mortage.
Q: I bought a property for R1 million last year in April. I paid a deposit of R100 000 and the rest was mortgaged. I will be turning 50 in November this year and my bond repayment period is 20 years. I will however be retiring in the next ten years so what can I do to repay my bond before I retire?
Our biggest assets often start out as our biggest liabilities. Very few home owners are lucky enough to buy these assets for cash and as a result most homes are mortgaged by first time buyers.
This is not necessarily a bad thing as long as you are realistic about what you can afford. Borrowing money to purchase a fixed asset such as a house can turn out to be a great investment.
However, as time goes by your circumstances change and so does the need to pay off your debt. Remember, by paying off your debt you are actually investing in an asset with a guaranteed return, with that return being the interest rate at which you are borrowing. And the sooner you settle the debt the better.
So it is worthwhile considering the options available to you. Most banks offer you the flexibility to pay off your home loan before the end of your contractual term. What is not often clear is how much you should put into your home loan in order to pay it off by a certain date.
Although this does depend on the actual rate of interest, it is possible to use the table below as a rule of thumb. The figures are based on an interest rate of prime minus one percent, i.e. 8.25%.
| Outstanding term on your loan | How much more can you pay per month? | |||
| 10% | 15% | 20% | 50% | |
| 20 | 16.1 | 14.7 | 13.6 | 9.4 |
| 19 | 15.4 | 14.1 | 13.1 | 9.1 |
| 18 | 14.7 | 13.5 | 12.5 | 8.8 |
| 17 | 14.0 | 12.9 | 12.0 | 8.5 |
| 16 | 13.3 | 12.3 | 11.4 | 8.1 |
| 15 | 12.6 | 11.6 | 10.9 | 7.8 |
| 10 | 8.7 | 8.1 | 7.7 | 5.7 |
| 5 | 4.5 | 4.2 | 4.0 | 3.1 |
To use the table, first look for the outstanding term of your home loan on the left. Next you have to decide how much more you can put into your home loan on a monthly basis. The number in the table that matches the outstanding term on your home loan and the extra amount you can save is the number of years in which you will pay off your loan in full if you commit to the additional monthly contribution.
For example, if your outstanding term is 15 years and you can afford to pay additional 15% per month then you will pay off the home loan in 11.6 years (11 years and eight months).
Most banks offer home loan calculators on their websites that will guide you in exactly what you would need to pay in to pay off your mortgage in the ten years you mention. For example, FNB has one that allows you to see how contributing different additional amounts would affect the term of the loan.
It would be worthwhile to ask your financial adviser about this when you have your next annual review since there may be other options available to you.
article found on Moneyweb
Author: Patrick Cairns
