Homeloan Series Vol 1

The purpose of this series of articles is to provide bondholders in South Africa with practical and simple methods of reducing their bond terms, thereby saving money in the process. We will use practical examples to illustrate the effect that these methods can have in reducing your bond term.

Some people will find certain methods useful, while possibly finding others impractical. It all depends on your personal preferences and lifestyle. People with electronic access to their bond accounts will find many of the methods easier to apply than people who do not have such access, as the quick and simple transferring of funds into and from the bond account forms the basis of much of the information you will read. However, the principles that we will discuss apply to all bond accounts and can be used by anyone who is serious enough about saving money and willing to apply their minds, and perhaps a little time, to the process.

It is of course imperative that your bond instalments are up-to-date at all times, as you do not want to transfer additional funds into the bond only to find that you cannot gain access to them as they have been applied towards catching up the arrear payments. We suggest that you check with your bankers to ensure that you can get trouble-free access to any additional payments that you make, and to establish if there will be any time delays. Also, establish whether there are any costs involved in transferring money to and from your bond, so that you can weigh up this cost against the benefits gained.

As a starting point, let us explain why your house costs so much money:

Interest is calculated on your debt to the bank on a DAILY basis, and the common practice in South African banks today is to capitalise the interest MONTHLY, on a certain date each month. This means that each month an amount of interest is added to your debt, thereby slowing down (drastically!) the rate at which you pay off the original loan amount. It also means that in each of the following months you are paying INTEREST ON INTEREST. For purposes of illustration, we will use the following example of a typical bond account. For uniformity we will continue to use this example throughout:

Capital debt (i.e. balance owing): R500 000
Interest rate: Prime (15% at time of writing).
Remaining period of loan: 20 years
Minimum Monthly Instalment (approx): R6 584

(Please note, exact bond repayments may differ from account to account, even if the above variables are the same. This is because factors such as the time taken between registration and first payment, and the time between payments and interest dates have an influence on the calculation. All Rand amounts quoted throughout this document are therefore approximate in nature).