With the end of March approaching, many (financial) professionals will be looking forward to receiving their yearly bonus.
Some will take that money and happily spend it on a new car.
Others will enjoy spending it on that yearly special holiday (perhaps this year to Maritius?) as they’re in dire need to go on.
Perhaps one ought to stop for a moment and think about the another (important) option out there: paying off a portion of your home loan! Either put aside the amount and add an extra payment per month towards the bond throughout the year or put a lump-sum amount down towards the loan. Needless to say that either action will result in a significant savings over the term of the loan.
Say there’s a yearly R17,000 bonus coming your way, of which half (R8,500) will be put towards paying off the loan. For example, without the extra payment per month done throughout the year, a bond of R500,000 at 9% over 20 years has about a R4,500 monthly instalment but add roughly R700/month to that for an entire year and the term of 240 months will turn into one of 170 months! If, in this case, a once-off lump-sum of R8,500 (half of the bonus received) goes immediately towards paying off the loan, there’s almost 10 months that come off the loan term!
Another upside of making extra deposits is that the banks look favorably at these homeowners if there’s ever a time when another loan is requested (ie buying 2nd property), in the form of cheaper bond conditions because lower interest rates will result in R1,000’s if not R10,000’s saved!
Bottom line: even a small extra deposit can reduce the total length of the bond term. We all get those monies coming to us every now and then. Next time, you ought to perhaps think of what you read here before you go out & spend it!