The benefits of paying an additional amount into their bonds every month offers savings that many homeowners may be not aware of.
The latest Old Mutual Savings and Investment Monitor (July 2019) shows that only 25% of homeowners are paying more than the minimum bond instalment every month, while 5% occasionally add a lump sum such as a tax refund or a bonus cheque, says Rudi Botha, chief executive of bond originator BetterBond.
“And yet one of the best investments homeowners can make is to use any additional money they have available to shorten the repayment period of existing debts and especially their home loans,” he says.
This is because the amount of interest they can save by paying off their home loans early will in most cases far outweigh the returns they could hope to achieve by putting their savings in the bank.
“What is more, these returns will be entirely tax free and, if you have an access bond, your money will be easily available if you should need it in an emergency.”
Botha says the latest BetterBond statistics indicate that the average home loan granted is now around R975 000, which means that at the current prime rate of 10%, the average minimum monthly bond repayment is about R9600.
“And, thanks to the way compound interest works, the home-owner who pays only this minimum amount each month will pay more than R1.3m in interest over the lifespan of a 20-year home loan.
“On the other hand, the home-owner who pays just 10% more than the minimum each month will pay off the home loan in 15 years and four months - and save some R360000 worth of interest in the process.”
That represents a return of more than 100% on the additional R177000 invested in the home loan. The property will appreciate in value while it is being paid off, so homeowners can make further returns on investment if they sell.
However, many homeowners do not have any money available for such savings. Citing the Old Mutual report, Botha says savings as a percentage of household expenditure currently averages 16%. This is up from 14% last year. The average rand amount allocated to savings is R2260.
He adds that the survey also found that savings priorities are funeral expenses, retirement, emergency/rainy-day money and children’s education. Accordingly, the main savings vehicles are formal funeral, education, retirement and life insurance policies, as well as accident and disability insurance, and stokvels or savings clubs - none of which, he says, are likely to deliver the same sort of returns as putting your savings into your home loan account.
“Consequently, we would urge those homeowners who are still paying off a bond to seriously consider reallocating at least some of their savings to paying an additional amount each month.”