Many people are trying to settle their home loan early. It’s a good strategy and something that I did myself for my primary property (the property that I live in). Let’s look how to go about settling your bond early, as well as the advantages of doing this.
What does it mean to settle your bond early?
Settling your bond early simply means that you pay it off sooner than the agreed upon term. So, one would usually have a home loan for a 20 year period, but you could finish paying it off is say 10 years. One is permitted to pay off your home loan debt early and can generally do so without incurring any penalties.
Once the bond is settled though, actually closing the home loan account and receiving the title deeds will cost you anything between R4,000 – R10,000. This is the fee for the bond cancellation attorneys who physically cancel the bond in the Deeds Office and have the title deeds amended to be in your name. The bank appoints the attorneys and the fee is really up to the firm involved. You have very little (if any) room for negotiation.
Why pay your home loan early?
So now why settle your home loan sooner than you need to? On one side of the argument is the fact that you have a set monthly instalment which becomes easier to pay each year as your income increases. This gives you a stable and predictable budget and allows for more money available in your budget. You can thus afford to enjoy life more as you spreading the cost of your home over 20 years.
On the other hand though, paying extra into your bond each month may strain your budget. It will probably cause you to cut back on luxuries and make some sacrifices. However, once the bond is paid, you will suddenly have lots of disposable income and you’ll be in a great financial position of owning a fully paid for property.
Once your home loan is paid, you have significant disposable income.
Try out the Home Loan Calculator.
Is it actually worth paying your home loan off early?
Well, yes and no. It’s a bit of a conundrum. If you can invest your money at a greater return than your home loan interest rate, then yes, it’s a no-brainer. However, as you know, markets are unpredictable, as is the Reserve Bank in setting the repo rate (which affects the Prime Lending rate).
If that sounded confusing, let’s just summarise and say – no-one knows what the next month, year or even few years will bring. You don’t know if your income is stable, you don’t know whether interest rates will go up or down, and you don’t know what your investments will do.
Have a look at this post where I show the calculations I did when deciding whether to pay off my home loan or rather invest. I decided to settle my bond early primarily for the peace of mind. I’m now 100% debt free which means I am less dependent on my salary and I have some room to make financial decisions which someone with loads of debt simply cannot do.
I could for example choose to quit my job as I have sufficient savings and minimal expenses. I could last a good few months. Having settled my bond has certainly been worthwhile from a stability, emotional, and FIRE perspective. FIRE stands for Financially Independent, Retire Early. I am very focussed on the FI part and less focussed (although super keen) on the RE.
For me it was a good decision, but you need to look at your finances holistically and also decide on your priorities.
Should I close my home loan account?
If you decide on settling your bond early, should you actually close your home loan account too? This is a bit of a personal opinion and also related to your financial situation. Keeping the bond account open means that you potentially have access to the funds, but you do pay a monthly admin charge on the account. Take note though that you do not necessarily have access to the bond amount and you may be required to pass the necessary credit checks to use it.
What this means is that if you take out a home loan for R1 million and pay it off in 5 years time, you definitely do not have access to R1 million in your bond account. At best you would be able to access the amount equal to the outstanding balance had you simply paid the usual payments. However, the bank may require you to reapply for the amount and go through a full credit check.
Armed with that knowledge, is it really worth keeping the account open? Well some might argue that it is as going through the credit checks is not too hard and one can then access cash when needed. Be it for renovations or some sort of large expense.
I personally closed my bond account as I will rather save up for any expenses going forward. It’s a personal choice but once you’re debt-free it seems silly to place yourself in temptations way.
Using your access bond as an emergency fund is not necessarily a good idea as many propose. Mainly because of the fact that you can’t necessarily access the money. Read more on that in this post on where to save your emergency fund.
Should I settle my bond early on a rental property?
Owning a property that you live in versus an investment property should have different financial strategies. Even more so if your investment property is owned in a legal entity such as a company or trust. I’m no tax expert but at a high level, if the property is in your personal name it probably doesn’t matter from a tax perspective whether you pay it off early or not. If it’s in a legal entity though, then settling your bond early definitely has tax implications.
Either way, consult a tax specialist as everyones circumstances and ultimate plans are different. Settling your bond on a rental property needs careful consideration and you need to understand the full implications.
How to pay off your bond in 5 years
Paying off your home loan in 5 years is no easy feat and it’s only possiby if you have really bought within the lower limit of your means. Thus, if you could pay R30k a month towards a bond but you buy a place that only requires an instalment of say R12k a month, then you could pay your loan off much sooner. Or of course if you receive a windfall of cash or perhaps get a great increase.
It’s also tricky to pay more off on your loan in the first few years as you’re usually a little stretched in your budget. However, it’s the first few years where paying extra makes the biggest difference.
I guess what I’m saying is that t doesn’t just happen, you really need to plan to buy an affordable place that you can pay off much sooner. Also, having a large deposit certainly helps!
Let’s take a look at the following example:
You have a home loan of R800k over 20 years at an interest rate of 7% per year. This will result in an instalment of R6,202.39. The interest portion within the first 2 years is equal to just over R109k whereas the interest portion in the final 2 years is only R10k. So it really pays to pay extra into your loan right from the start. It’s the beginning months that matter the most!
In this example you would need to pay approximately R9,600 extra into your bond each month in order to pay it off in 5 years. That is obviously not always possible so it’s vital to set realistic goals that are actually achievable (even if very hard).
But lets say you managed to to this, you would end up saving yourself over half a million rand in interest! Can you imagine? That’s a lot of money.
So how does that work? Well, simply put, if you pay your normal instalment of R6,202.39 (in our example), it equates to R1,488,574 over 20 years. Paying the standard instalment for 5 years along with the extra R9,600 each month totals R950,920. That’s R537,000 less. You are saving that in interest.
It may be impossible to pay off your home loan in 5 years, but even just paying R200 extra per month in our example would allow you to pay off your home loan a year sooner and save just over R50k.
Settling your bond early really makes sense and saves you money!
Are you planning on settling your bond early? What are the considerations for you? Let me know in the comments or find me on Twitter – let’s chat.