Bond benefits: Your home loan as the ultimate savings vehicle
Category Advice
The purpose of an investment is always to grow your money. Whether the vehicle through which you hope to do that is a retirement annuity, exchange-traded fund, unit trust or a plain old savings account, the point is to select the ones likely to yield the highest interest over the mid- to long-term. With this point in mind, it's useful to consider your bond as another savings vehicle, rather than an expense.
We're often asked, especially by first-time buyers, whether it is "better" to forgo all other forms of saving and investment to put all available money into the bond. While an answer to this question is not the domain of the property professional, we can offer some useful insights into the value of using your bond as one form of savings.
Considering that a property is the biggest investment most people ever make, and by extension their biggest asset, it makes sense that the sooner you're able to pay off the bond, the more interest you'll save. Thus having extra money available sooner to either invest or leverage the asset as collateral for further investments.
It pays to understand the value and benefits of paying more than the minimum monthly requirement into your bond, whether as a once-off lump sum or smaller amounts at more regular intervals.
All about the interest
Compounding interest - when it escalates in your favour - has often been called the eighth wonder of the world. But when you're paying the interest on your debt, rather than earning nie, it's the antithesis of wonder but rather the enemy of wealth. When it comes to a bond, the monthly payments made in the first years typically go towards paying interest without making a dent in the principal debt. As such, the sooner you start paying more than the minimum into your bond, the faster the interest will go down and the quicker you'll pay off the bond.
By way of a simple example, the Additional Payment Calculator on BetterBond.co.za shows this:
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What the above demonstrates is that as little as R1000 (though the exercise can also be done with R500), which is essentially the cost of two family meals at a mid-range restaurant can save you a quarter of a million in interest. The takeout here is simply that paying extra into your bond, be it R500 or R1000, can make a significant difference to your financial wellbeing in the long run. And don't be daunted by the number, every little bit helps. |
Author: Skoko Sebola
