Should you consider settling your bond early?

The question of settling your bond early has no straightforward answer. It is something that requires a lot of research and consideration.

Of course, you want to pay off your bond as soon as possible as it can become tedious to pay off such a big amount over a long period. On the other hand, however, if you put all of your savings into your bond, you might find that you don’t have extra money for other debts. 

This is quite the conundrum. The best way to solve it is to look at the advantages and disadvantages of paying off your bond early. 

The advantages

There are several reasons why it is beneficial for you to settle your bond early:

1) You save on interest

A home loan always comes with added interest. The sooner you pay off your bond, the less interest you will pay in the long run. To put this in perspective, let’s work with a sum of R 1 000 000.

At the current interest rate of 7.75%, your monthly mortgage is R8 209. Over 20 years, you will be paying R970 438 in interest alone. But if you decide to pay only R1000 extra, you would save R241 899 over 20 years and you would reduce your loan term by about 4 years.

Within 16 years, you have saved on interest and you have paid off the property. 

2) Settling your bond frees up retirement money

Settling your bond early means that you will have more financial freedom as your golden years approach.

The money that you would have spent on your bond can now be invested or saved. This will help a great deal in supplementing your pension every month.

It also eliminates the unnecessary stress that comes from having to pay off a bond without having a full salary to rely on. 

See also: 5 Ways You Could Lose Your Home Besides Not Paying Your Bond

3) You can make a profit when you sell when settling your bond early

If you decide to sell your property then a settled bond will only benefit you financially.

Instead of having to settle the outstanding amount with the bank, you get to keep the profit when selling.

This is especially useful if you are downsizing. The new property will probably cost less than your current property so you can use the profit to help you with your next investment. Alternatively, the profit can go into an investment or a retirement fund.

All these reasons sound very convincing but there are also a few disadvantages to settling your bond early:

The disadvantages

1) You can’t pay off any other debts

Shoving all of your extra money into your bond means that you don’t have savings left to pay off other debts. This means that these debts are going to be syphoning your bank account for a longer time each month.

Even though these amounts might not be as big as your monthly bond repayment, it is money that you can’t use for anything else.

It is better to settle your smaller debts first. You can then use the money you would have paid towards other debts to pay off your bond account.   

2) You are putting all your eggs in one basket

Unfortunately, we live in very unpredictable economic times. This is why it is very important to have a diverse portfolio.

The more money you have invested in different places, the better.

If you decide to invest all your extra money into your bond account, you will never have the chance to diversify your investments. Your property becomes your only investment. It is important to remember that with every investment there is financial risk. By putting all your eggs in one basket (your bond), you are not spreading that financial risk equally over different investments.

If you lose your house, for example, you have nothing else to fall back on.

See also: 3 Great Reasons Why Paying Cash For a Home Doesn’t Make Sense

3) You might have to pay bond cancellation fees when settling your bond early

When you have paid off your bond completely, there is one sneaky payment that rears its head: bond cancellation fees.

This is not a fee that is due to the bank but it is due to the conveyancing attorney. The reason for this is quite simple. Before you settle your bond in full, the bank keeps the title deed and the original mortgage bond. As soon as you pay it off, the title deed is handed over to the homeowner and this process requires the professional services of a conveyancer.

These are luckily not prescribed fees and they are negotiable. However, it is not something that you can avoid paying.

Final thoughts

There is no doubt that paying off your home loan can give you a better sense of financial freedom. You don’t have to pay an exorbitant amount every month, you save on interest, and you can reduce your loan term.

Paying off your bond also has its disadvantages. Your money is limited to paying off the bond only, you are not diversifying your portfolio, and you have to pay to cancel your bond. 

When making a decision, think carefully about whether the pros outweigh the cons.

Do further research, take a careful look at your finances, and don’t make any big decisions before you have all the information. You can always pay a little bit extra per month rather than all the extra money you have.  

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