Making your bond work for you

A home is a serious investment and, like all investments, it needs to be managed properly in order to ensure that you get the best possible return.But few people, once they’ve had their bond registered and start repaying the loan, give their most important investment another moments thought. Yet there are a number of important steps that a homeowner can take to ensure that their hard-earned money is being put to good use.

Increase your bond repayment:

When you borrow money to purchase a home you are in effect taking out two loans. The first loan is to repay the capital amount (known as the principal sum) and the second loan is to repay the interest charged over the period of the loan.

The majority of the money you repay in the first years of having a home loan goes towards paying back this interest, which will only marginally reduce the principal sum.

In South Africa, interest is generally calculated daily on your mortgage. In effect this means that the amount you owe the bank increases every day. Because of the nature of compound interest, regular additional repayments made at the beginning of your loan term will have a much greater effect on the cost of your bond than if you start paying extra cash into your bond account five or ten years down the line. However, even if you are already a number of years into your loan term, you can still make a considerable saving by paying additional money into your bond. By increasing your monthly instalments, you’ll reduce the term of your bond, which means that you won’t be paying heavy bond instalments in later years. The end result is that you will have paid less money in interest over the term of the loan.

There are a number of easy ways that you can put additional money into your bond without really feeling the difference in your pocket:

  • Put the additional income you receive from your annual salary increase into your home loan
  • When interest rates decrease contact your lender and ask them to maintain the installment that you were paying prior to the drop on lending rates
  • Put a portion of your annual bonus into your bond At SA Home Loans, you may put extra money into your bond anytime you want to. Every little bit helps. Making a prepayment when the loan registers is particularly helpful, as you will reduce the capital amount immediately, significantly reducing the total interest payable over the term of the loan.

Use your bond as an interest - bearing savings account:

Banks are in business to make profit so it makes sense that they charge a higher interest rate to people borrowing money from them than they do to investors who deposit funds with them. For example you might be receiving 2% interest on a positive balance for money in your savings account, but are probably being charged a much higher rate for the money you’ve borrowed to pay off your home loan.

By depositing your savings into your bond, you are in effect receiving the interest rate that the bank charges you on your loan as positive interest on the money you invest For example, if you have a bond for R1 million, and you deposit an extra R100 000 into your home loan, you are now no longer being charged interest on R1 million, but rather on R900 000. The money you save in interest over the time that you keep the R100 000 in your home loan is the positive interest you are in effect receiving on the money you’ve deposited. Plus you can apply to withdraw this cash when you need it (Remember that your monthly instalment would need to be fixed at the amount prior to the pre-payment - as at every reset date, the new instalment is calculated based on the new outstanding balance).  At SA Home Loans, clients may make six withdrawals per annum of amounts greater than R10 000.

Consolidate your debt:

Interest rates charged on home loans are generally a lot lower than the rates you will pay for vehicle finance, credit cards and store accounts.  So it makes financial sense to consolidate these debts into your home loan.  But of course home loans are calculated over a much longer period than these other short-term loans, so it’s imperative that you maintain the installment you were making prior to moving the debt across to your home loan in order to pay it off over the same time period.  If you pay the short-term loan balance off over the full life of the home loan – often 20 years or more - it will end up costing you a lot more in interest.

Build up a good credit history:

You can build up a good credit history by repaying your home loan on time every month. Lending institutions will look at an applicant’s credit history when deciding whether or not to grant a loan, and will also consider their credit rating when determining what interest rate to charge a client.  Thus, by paying off your home loan in a responsible manner, you might end up saving yourself money in terms of lower interest rates on future loans.

What must I do if I have difficulty paying my home loan instalment?

Skipping your home loan repayments should be avoided – not only will missed payments impact on your credit record, but it will also increase the capital balance outstanding on your loan, which will increase the overall interest payable. If you fail to meet your payment commitments over a period of time, it could lead to legal action and the loss of your home. So it’s important to prioritise your home loan repayments each month.

Communicate with your lending institution

If you are having trouble paying your monthly home loan instalment, the most important thing that you must do is to tell your lender about the problem. People often try to avoid contacting their lender because they don’t want to face up to the situation they’re in, or fear they will be reprimanded. By contacting the lending institution you may be able to make an arrangement that will help you, such as allowing you to pay off the arrears gradually alongside your usual payments. Your lender will discuss the options available to you based on your particular circumstances.

Looking after your investment:

Maintaining your home

Owning your own home is a wonderful thing, but with it comes the responsibility of looking after the property in order to ensure that the money you’ve invested isn’t thrown away.  Houses require a lot of time and money to keep them in good condition, but this is money well spent – since it is far more expensive to replace items than it is to maintain them.

Pay special attention to the following areas in your home:

  • Wooden door and window frames The weather in South Africa can be very harsh on items such as wooden frames. To prevent wooden frames from rotting, homeowners should varnish their wood as and when is needed, which might be as often as every six months.  It’s also important that people who have wooden floors keep a lookout for borer and other wood-eating insects.
  • Clean your gutters regularly Gutters that aren’t cleaned out will become ineffective over time and may cause damage to your walls and ultimately your foundations. Maintaining your gutters will also mean they will last for years to come.
  • Paintwork If your house needs repainting, it's better to spend the money on a good quality paint as this will save you money in the long term. Ensure that outside walls are cleaned regularly.
  • Swimming pools Must be maintained regularly in order to avoid structural problems or the need for resurfacing. Check the PH balance every two weeks and backwash your pool once a week.
  • Garden The value of your property can increase significantly with a beautiful garden. Make sure that your garden is well-kept and think about investing in indigenous plants. Indigenous gardens are easier to maintain and are becoming more and more popular with home buyers.  Additionally, they use fewer resources such as water and fertiliser.

Monitor developments in your neighbourhood:

It’s important that you’re aware of any developments in your neighbourhood that may have a negative or positive impact on the value of your home.  If you’re proactive about the area you live in, you won’t be taken by surprise and may be able to have a say regarding any potential changes in your neighbourhood.  The following are some of the things that you can do to make an impact:

  • Participate in local police forums.
  • Hold regular neighbourhood meetings to discuss issues that affect your community, such as crime or litter.
  • Take note of any new buildings or renovations.
  • Make sure that you know the name of your ward councillor.

Home improvements:

Making additions to your home or renovating existing spaces can be a nerve-wracking process, but done intelligently, the money you spend can turn out to be a wise investment.  The rule of thumb is that renovations to bathrooms and kitchens are most likely to increase the value of your property, but adding additional space to your house can also serve you well. Not only will you increase the value of your property, but by adding a garden cottage or similar structure, you are also providing the means to gain rental income which can be used to help pay off your bond.

If you are thinking about making home improvements, you should be aware of the following:

  • Ensure that you have planning permission if necessary.
  • Try to use a builder who is registered with the National Home Builders Registration Council (NHBRC).
  • Research the prices of similar properties in your neighbourhood, so that you don’t make the mistake of over-capitalising your property.
  • Be aware that building work nearly always takes longer than you or your builder think it will, and often costs considerably more than the original quote.

If you need funds for home improvements, speak to us about the ways in which you may do this, prior to starting renovations, as borrowing against your home is often your cheapest source of finance.

We have various further lending options for existing clients, while new clients who are switching to SA Home Loans may be able to get Quick Cash.