For most people, purchasing a property is the single largest investment they are likely to make. This investment is usually made by securing a home loan from a financial institution.
The largest chunk of the money you pay against your home loan is interest. It makes sense, therefore, to do everything possible to reduce your interest burden.
Here are a few suggestions:
1. Pay more than you have to.
Pay a couple of extra Rand into your home loan account regularly every month. (Any extra amount (over and above the required minimum monthly instalment) you are able to pay into your home loan account will reduce the capital owing, thereby reducing the interest payable and, of course, the repayment term.)
2. Play around with the “dead” money in your other bank accounts:
Your home loan interest is calculated on the daily balance. If you move money into your home loan account – albeit temporarily – from “dead” money accounts such as current or transmission accounts, your home loan will be smaller for as long as that money remains in your home loan account. A smaller loan means lower interest charges. (Very important: i) Make sure that you have an “accessbond” facility on your home loan in order that you may electronically transfer any extra funds OUT of your home loan account again as and when needed, and ii) Check whether there are deposit/withdrawal fees on your home loan account and what these fees are …. You do not want deposit/withdrawal fees to negate the benefits of temporarily moving money into your home loan account!)
3. Develop different payment habits:
Because the banks calculate interest daily, you will save on interest if you pay your home loan a couple of days BEFORE month end, OR if you split your repayments so that you pay half the amount two weeks early and the other half right on time. For example if your monthly repayment is R6000, half the payment would be R3000. By making a R3000 payment at the 15th of the month and another R3000 payment at the end of month you save on the daily interest over the 15 days between payments while also reducing the outstanding capital. This means that you will be cutting the term of your loan. Following this simple advice could cut a 20 year loan (at fixed rates) by around two years.
4. Change the debit order date on your home loan account:
If your bond instalment is being paid via debit order on the first day of every month, change the debit order date to the last day of every month. You will however have to ensure that there is ALWAYS sufficient funds in your bank account to cover the bond instalment. This could be a problem if your salary is paid on the last day of the month as it may only appear in your bank account the next day. This option is therefore more suited to persons who are paid a couple of days before the end of the month. (It is of the utmost importance that you ensure that there is always sufficient funds in your bank account to cover the bond instalment. The non-payment or late-payment of even ONE instalment will lead to an adverse comment on your credit record and the bank will debit your current account with a hefty penalty fee.)
5. Make lump-sum payments into your home loan account: This tactic is well suited to people who receive an annual bonus and who may want to use some of the money each year to eat away at their home loan.