How much money you save by paying off your home loan early

How much money you save by paying off your home loan early

Many South Africans are making plans to get better control of their finances amid the political noise and the decision by two major ratings firms to downgrade the country to non-investment grade, or junk status.

As a result, people are looking for the best return on their money, whether they are saving for a holiday, planning a legacy for their children or investing for retirement.

According to Shaun Rademeyer, CEO at bond originator, BetterLife Home Loans, paying money into your existing home loan account to shorten the lifespan of the loan each month is one of the better investment choices.

“The reason is that the amount of interest you will save on your home loan by doing this will in most cases far outweigh the returns you could hope to make by choosing seemingly more exciting or adventurous investment avenues.”

BetterLife statistics indicate that the average home price in South Africa is now R1.1 million, while the average deposit being paid is 22% of that, leaving some R858,000 to be financed by way of a home loan.

“At the standard home loan interest rate of 10.5%, that would put the average monthly bond repayment on a 20-year loan at just under R8,600. And, thanks to the way compound interest works, the homeowner who pays only this minimum amount each month will pay almost R1.2 million in interest over the life of the loan – or more than the original cost of the property.”

On the other hand, the homeowner who pays just 10% more than the minimum each month – or an additional R860 in the example above – will pay off the loan in 15 years and three months instead of 20 years – and save some R334,000 worth of interest in the process.

“That represents a return of more than 100% on the additional R158,000 invested in the home loan, and there really aren’t many other investments that can guarantee you that kind of return – and at the same time deliver a fully-paid-for property,” Rademeyer said.

Also noteworthy, is that the property itself will also have appreciated in value while the owner was paying it off, meaning better overall returns.

“Our statistics show that the average home price at the end of February this year was almost 20% higher than the average just three years ago, at the end of February 2014, while the latest FNB figures show a 297% increase in the average house price over the past 16 years,” said Rademeyer.

Article from privateproperty