Owning a place that you can call home is really awesome, but having to pay for it over 20 – 30 years is absolutely dreadful! It’s like having a noose around your neck; just one mishap and bang – the bank jumps on you and there’s a strong possibility of losing your home. I find that rather stressful!
Life happens and we cannot know for sure that we’ll be able to work for the next 20 years, but more importantly, do we really want to work only to be able to pay the installment? It’s okay if you really love your job but the reality is that most people don’t and that we are all just slaves to our jobs. We need money to spend money and we buy things that we can’t afford to make us happier but then we need to work harder to get more money… it’s a vicious cycle! And in between that cycle is a fixed monthly installment for almost a quarter of or our lives. That’s a bit depressing don’t you think?
What is freedom?
Freedom is a broad term and will obviously mean different things to different people. For the context of this post though, imagine you’re paying a monthly installment on your home and you still have 17 years left to go. Look at the following scenarios and think about what freedom would mean to you:-
- How would life be if you paid your house off in 7 years from now and had 10 years of installment payments to have fun with? (Or to invest but let’s not get too serious now)
- What would it be like if you paid off your house in say 5 years and then rented it out while you travelled for a few months?
- Imagine the first nights sleep in a fully paid off home – wouldn’t that be bliss and a huge stress relief?
- Think about losing your job and still needing to pay the monthly installment, what does that imply?
- Imagine being 100% debt free and owning the place where you live. Having the options of keeping it and living there, renting it out or even selling it. What would having those options available mean to you?
- Would early retirement be an option if your home was paid off 10 years early?
How can you buy freedom?
So this might sound like a weird way if looking at things, but to me paying off my house early equates to investing in freedom. If I pay the loan off 5 years early, not only do I save money on the interest, but I also have 5 years where I can use the installment amount on something else. But paying it off 10 years earlier is even better! I would suddenly have a huge amount of money free each month to invest or to do with as I please. So many new options and opportunities would be available!
I’ve met a few people recently who are very content with paying off their loans over the next 20 years. To them it seems like fate, or their “lot in life”; as though there is no option and no way around it. But is that really so?
Just a few hundred rand extra each month can shave years off your bond! And using your bond as a savings account can help even further. If you actually calculate your bond over the full 20 – 30 years and work out the savings in time & money I am sure that you will be shocked at the end result. How much money you can save and how much earlier you really can pay off your loan is incredible!
So firstly, you may be wondering whether you should stop your monthly investments and rather focus on paying off your home loan. Don’t do that without proper research! There are many factors that come to play and many different views on it. There are many articles online and your financial advisor should be able to assist with calculations based on your specific circumstances.
Secondly, you may be wondering how you’ll be able to pay any additional monies towards your home loan; especially if you’re already on a tight budget. No need to stress though, here are a few tips on how to save extra in your home loan without affecting your budget.
5 Tips to help you pay extra towards your home loan
These tips should help you to pay more towards your home loan without affecting your budget at all (and if it does affect the budget it will be negligible).
Tip 1: Increase your monthly installment by 1%. Take your installment and multiply it by 1.01 and ask your bank to change your automatic payment to the new amount. If your current installment is 8,000 your new installment would be 8,080 (8000 x 1.01 = 8080). It’s such a small difference you’ll barely notice it.
Tip 2: If you go out for coffee (dinner or drinks) with friends and your friend ends up paying for you, immediately take the amount that you would have spent and transfer it to your home loan. You were planning on spending that money anyway so just transfer it out of your account immediately to avoid spending it on something else.
Tip 3: If the interest rate on your home loan ever decreases, ask your bank to keep your payments the same. There will be absolutely no change to your monthly budget but yet you’ll paying extra into your bond.
Tip 4: If you ever receive a bonus from work, keep half for yourself and pay half into the bond. You can still have fun with the extra money but you would have paid a nice extra amount into the loan.
Tip 5: When you receive a salary increase, increase your monthly loan installment by the same percentage. Thus, if your salary increases by 7%, increase your installment by 7%.
Bonus Tip: Look at your daily habits and see where you’re really just wasting money. See how much that coffee is really costing you.
It’s probably quite easy to pay a small extra amount into your home loan each month, and it really will make a big difference over the long term. The more you sacrifice now though the bigger the reward and it is really worth the effort to actively pay every last extra cent that you can towards your bond! In fact, have a look why I’m paying my home loan off early instead of investing. You don’t have to be a slave to the system for the next 15 – 20 years! Cut back on “luxuries” or things that you feel you “deserve” and focus on paying off your debt and you’ll soon reap the rewards of financial freedom! It’s not impossible!