A home is a serious investment, and like all investments, it needs to be managed properly in order to make sure you get the best possible return. But it’s only a few people who actually find time to pay more attention to this investment after registering their bond.
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 usually calculated daily on your mortgage. 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. You will have paid less money in interest over the term of the loan.
There are a number of ways you can put extra money into your bond without 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 instalment you were paying prior to the drop-in lending rates.
Put a portion of your annual bonus into your bond. At SA Home Loans, you can put extra money into your bond whenever you want to. Every little bit helps. Making a pre-payment when the loan registers is particularly helpful, as you will reduce the capital amount immediately. This will significantly reduce the total interest payable over the term of the loan.
Banks are in business to make a 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 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 starting from R10 000 or more per year.
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 very important that you keep paying the instalment you were paying before moving the debt across to your home loan. 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.
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. By paying off your home loan responsibly, you may end up saving money with lower interest rates on future loans.
Skipping home loan repayments should be avoided. Not only will missed payments impact your credit record, they 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, it could lead to legal action and the loss of your home. So it’s important to prioritise your home loan repayments every month.
If you are having trouble paying your monthly home loan instalment, the most important thing you can do is tell your lender about the problem. People often try to avoid contacting their lender because they don’t want to confront the situation they’re in, or fear they will be reprimanded. Contacting your lending institution may allow you to reach an arrangement that will help you, like 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.
Maintaining your home:
Owning your own home is a wonderful thing, but with it comes the responsibility of looking after the property to make sure the money you’ve invested doesn’t go to waste. Houses require a lot of time and money to stay in good condition, but this is money well spent – since it is far more expensive to replace things than it is to maintain them.
Pay special attention to the following areas in your home:
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. These are some of the things you can do to make an impact:
Making additions to your home or renovating existing spaces can be a nerve-racking 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:
If you need funds for home improvements, speak to us before starting your 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.
Terms and conditions apply to all products. The availability of lending products is subject to our credit policy as amended from time to time.