Why should you pay off your home loan faster?

Owning a property is a significant milestone, but the long-term commitment of a loan can be daunting. You can potentially eliminate years’ worth of debt by paying even a little extra into your monthly bond - from day one or as soon as possible. Some of the specific advantages to paying off your home loan more quickly include:

a. Saving on interest

Adding to your minimum home loan repayment means that you save significantly on interest payments. For example, if you have an R1,500,000 bond over 20 years, at the June 2023 prime lending rate of 11.75%, paying off your loan in just 15 years could save you about R684,335.72 in interest costs*. This cash can be directed towards further investments or simply towards enhancing your overall financial security in retirement.

b. Freeing yourself from debt

Imagine the peace of mind that comes with being bond-free. In addition to effectively paying less interest, paying off your home loan ahead of time will give you more financial independence. Without the burden of your home loan, you can use the freed-up financial resources for other investments, retirement savings or personal interests (like following that entrepreneurial dream of opening your own RE/MAX Office, perhaps?).

c. Increasing your equity

If you have an access bond, paying off your home loan rapidly goes hand-in-hand with building your equity in the property and strengthening your financial position. This increased equity is a valuable asset that can provide a solid foundation for future ventures, such as renovations, or a lower-interest alternative to car finance.

Strategies for paying off your home loan faster

Saying goodbye to debt and achieving financial freedom is easier when you have practical steps that you can take right now. Although each of these strategies can get you closer to being able to say goodbye to your home loan ahead of schedule, remember to consult financial experts so that you can tailor these tips to your unique circumstances:

Secure the best interest rate – Begin your property-owning journey by securing the most favourable interest rate right at the start. Research and compare lenders' rates to ensure that you get the best possible deal on your home loan, which will help you towards early settlement. Using a bond originator like BetterBond has proven to help clients receive the best possible deal on their home loan. They will get quotes from all the major banks on your behalf, saving you time and money.

Lifestyle overhaul – Thoroughly examine your spending habits to identify where to cut back. Look carefully at your discretionary spending: dining out, entertainment subscriptions, and impulse shopping. By making smart choices and prioritising your financial goals, you can redirect those savings to your bond repayment and reduce your home loan.

Turn your junk into someone else’s treasure – Embrace your inner minimalist and declutter to free your home from unnecessary items that are collecting dust. Don’t throw them out, rather explore online marketplaces and/or sell them via local thrift groups to convert your former treasures into cash that you can add to your bond repayment.

Every little extra helps – Every small, additional contribution makes a difference. Whenever possible, inject your monthly repayments with an extra dose of determination - even if all you can afford is an extra R50 this month. These extra amounts help to incrementally chip away at the principal debt, reducing the term on your home loan and helping you to save on interest charges.

Turbocharge with lump sums – Grab those unexpected windfalls, like a payment from the tax man or an unexpected inheritance, and transform them into bond-slaying missiles. Allocate this money, whether it's all or part of your annual bonus or a surprise influx of cash, to your home loan and watch the outstanding balance dwindle and the interest charges diminish.

Make the property work for you –Sweat your asset with a holiday hustle by renting out your guest room(s) during peak travel and vacation seasons (if you can). If your property has dual living potential, consider maximising that and renting that space out as short or long-term accommodation. Either way, this additional income added to your bond could be a game-changer.

Consolidation station – If you’re juggling multiple loans, like your car loan as well as other big-ticket items, investigate the power of consolidation. By consolidating your debt into a single loan, you could possibly negotiate lower interest rates and simplify your repayment journey. However, there are pros and cons to this option, so be sure to speak to a qualified financial expert before deciding to go this route.

Tailored home loan repayment strategies

Regardless of where you are on your property investment journey, paying off your home loan faster is a strategic move that can transform your financial outlook. Let's explore some of the options for different types of property owners, which could help you to leverage the power of early bond settlement:

First-time homebuyers – As a first-time buyer, instead of paying rent, it is advisable to get into the property market as soon as you can rather than delaying the purchase until you can afford your forever home. Purchase an affordable entry-level home that will appreciate in value over time and that you know you can afford to pay off faster. That way, the equity that you build by adding to your repayments early in the loan term can then serve as a stepping stone to upgrading to your dream home.

Emerging investors – Rental income often only helps investors break even (if they’re lucky) on the monthly repayments for the property, so paying off the home loan faster will mean greater profits through your rental income. For those starting out, it is better to choose an affordable property where the rental income has the potential to cover most (if not all) of the monthly expenses of the property so that the investor can focus on making extra payments on the loan. The faster the loan is paid, the quicker the investor can enjoy pure profit on the property.

Seasoned investors – For those who own several investment properties, the same logic applies. The sooner the debt is paid, the sooner the investor can receive a passive income through renting out the home. If the idea is to sell the property to move to bigger investment options, the more equity that is built in the home, the more the investor will be able to afford in their next purchase to acquire luxury properties or explore alternative real estate ventures.

What happens when a bond is paid off?

When you have paid off your home loan, your monthly expenses drop dramatically, and you have more budget flexibility. At this point, you have a choice: keep the loan account open or close it.

Assuming you have achieved your goal of paying off your home loan ahead of time, make sure you’ve read the small print in your contract. There may be penalties if you settle your home loan too early. Sometimes, though, you can avoid this if there’s a notice period and you give notice in due time or if you take out another bond with the same bondholder. There is also likely to be bond cancellation fees that you will need to cover.

One advantage of keeping your bond account open is that you can leverage the equity on your property for other finance. In addition, because the interest rate on the property is usually less than for other loans, your bond account is a less expensive source of credit. It’s important to carefully review the terms of your loan agreement to make an informed decision about how you manage your home loan and financial circumstances.

Turn to the property experts for support

Paying off your home loan faster is a prudent financial decision that offers various advantages, including interest savings, reduced financial risk, and increased return on investment. By implementing tailored strategies that take your unique circumstances into account, you can accelerate your journey to debt-free property ownership. Remember, every little bit counts because it all adds to your long-term financial well-being, moving you to a brighter future in the real estate market.

Have more unanswered questions? Here are some related questions – and answers – that might help…

When is the best time to pay extra on your bond?

The best time to pay extra on your bond is in the first ten or so years of the loan term. Banks structure the repayments so that interest is weighted more to the first half of the home loan term. This means that, to begin with, about 80% of your monthly repayment amount goes just to pay the interest with only 20% towards the capital amount. Consequently, over time, and towards the end of the loan term, you’re paying less on interest and more towards the equity in your property.

Is it smart to pay off your house early?

The short answer to this is that it depends on your personal circumstances. However, if you want to save on interest and effectively pay less over time to own your property, then yes, paying off your house early is very smart.

What happens when you stop paying your bond?

Unless you have settled the outstanding loan, not paying your home loan can have serious consequences, as it will have a negative impact on your credit score making it difficult to access credit in the future. If you don’t communicate with your bondholder and make a plan, they could take legal action and repossess the property and sell it to recover the outstanding debt. If the sale price does not cover the balance you owe, you will also be liable for any penalties, late fees, and interest charges, further increasing your financial burden. Always communicate with your lender if you're struggling to pay your bond so that you can explore alternative options, such as loan restructuring or refinancing.

If you have any more unanswered questions, contact your nearest RE/MAX Office.

Disclaimer: RE/MAX SA advises clients to get professional financial advice and cannot be held responsible for financial decisions based on the content of this article. All calculations are approximate and for illustrative purposes only.