Should you pay extra into your bond?
With savings rates at rock-bottom, overpaying on your bond is often a no-brainer. And for many it is, there’s the potential to save a huge amount even if you can afford an extra R100 a month.
“If you get it right, paying more into your bond can be a huge cash boost,” enthuses Charlotte Vermaak, principal of Chas Everitt Nelson Mandela Bay. “You’ll eat into the debt you've built up from buying a home, meaning you pay it off quicker, you don't pay interest on the amount you have paid into your bond, and the money you'd save on interest often beats the returns possible by putting it in savings, given savings rates are currently so pitiful.”
So, what do homeowners stand to financially gain? Based on a home loan of R1,000,000 with an interest rate of 11.7% depending on how much you can afford, the potential benefits you can reap vary. For example:
Total saving on interest
Ensure you have sufficient emergency funds
Although it’s great to pay more into your bond and reduce the term and what you pay in interest, budgeting logic says it's always worthwhile having a cash emergency fund.
Paying extra into your home loan and the cash is gone, but it depends on your agreement. So if you face an emergency (leaking roof or redundancy, not new shoes) and you don’t have spare cash, you could be forced to borrow again.
So it's always a good idea to keep an emergency fund in a good savings account – three to six months' worth of cash is a good guide, enough to live on if you lost your job, for example. If you're thinking of using newly arriving extra income (such as a pay rise) to overpay your mortgage, then build up an emergency fund first.
This applies even if the calculator shows you'd be better off overpaying your mortgage. It's what's known as 'a premium for liquidity'. In other words, it's sacrificing some interest for easy access to cash when needed.
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