Most South Africans fall into one of two camps regarding the home they live in. Either you’re a renter or you have a home loan. If you’re in the second group your monthly home loan repayment is probably one of your largest expenses. There is a third, tiny group who’ve paid off their home, but they’re unicorns and are probably sitting somewhere on a spring break sipping champagne.
For those with a home loan, everybody knows that paying a little more each month helps pay that loan off faster than the expected 20 years, but with some careful planning and discipline one can actually pay it off in seven years.
Seven years also happens to be the average period a person owns a home before selling and buying another, but that’s for another column.
The first trick is to pay extra every month. But make that extra 10% more than the bank requires. This shaves almost five years off the loan duration.
Next, as rates drop keep paying what you were, don’t decrease your repayments. This is a moving target in terms of how many years of payments we save because we don’t know what will happen with rates over the duration of the loan. But with a lower inflation target we should see lower average rates in the years and decades ahead and if you keep paying what you were you’ll save plenty more years of payments.
The next is to actually increase how much you pay every month as your salary increases. Let’s say you get a 5% salary increase next year. Increase your payments by an extra 5% and this easily takes another six years off the loan. Again no exact numbers because it depends on your salary increase, but over the years the extra money from salary increases is substantial.
The last trick is to pay the loan on your pay date. Most banks set the home loan pay date as either the first or last day of the month. Rather adjust that to your pay date. Even if you get paid on the 28th every month, that’ll mean paying two or three days earlier every month — which is a month in advance over a year.
This takes another year or more off the payment duration and that home loan is gone in seven years.
Now to be clear, for many the extra payments will tough. But we can manage by shopping down or even just taking a little pain on the budget every month. Because in seven years you’ve paid off your home and you have all that money you were paying into your bond to spend as you want. That extra cash can go into investing for retirement, savings, holidays and the like.
Yes holidays as well. You’d probably have sacrificed to pay off the home loan in seven years, now you can reap the rewards.
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