By: Andrea Tucker, Director at MortgageMe
We get it. The thought of paying off a house every month for the next 20 to 30 years isn’t exactly thrilling. But if managed carefully, you can use your bond to your advantage and build a nest egg of savings for life’s little and not-so-little emergencies.
It makes good financial sense to expect and prepare for financial emergencies and to get into the habit of saving every month. No amount is too small. If you’re able to able to save or invest some of your salary every month, as well as increase the payment on your home loan, you’re covering yourself for emergencies as well as saving for something specific through your investments.
A good place to start is by increasing your home loan repayments above the minimum requirement. Or, in times of decreasing interest rates (as was in the case in much of 2020) you can keep your monthly instalment the same as what it was prior to the rate drop. This disciplined behaviour provides you as a homeowner with a level of financial flexibility to deal with unexpected financial difficulties, or finally get round to making those dream home improvements.
Your home loan is the cheapest way to borrow money as you’ll never get lower interest rates on any other type of credit. Banks will allow you to withdraw any extra money that you’ve paid in above and beyond your minimum payments, which is why this is such a clever form of saving.
The nitty gritty
Let’s run some numbers to explain how all works: If you were to open a savings account that gave you immediate access to your funds, and you had R100 000 sitting in this account. Bank A would be paying 3.10%* interest on these funds. If you had a home loan at Bank A with an interest rate of 6.5% (prime less 0.5%), you would in effect be paying off your debt at a higher rate (twice the rate in fact!) than you’d be earning through your investment. If, however, you chose to take the R100 000 investment pay it directly into your home loan (in addition to your monthly payments), you would instantly reduce the term of your loan significantly and pay less interest over entire loan period. And if you needed those funds in a pinch, you would be able to access them easily.
Remain smart and disciplined about paying off your debt and you can make your home loan work for you!
 Interest rates applicable as at 24 July 2020. Bank A Prime Lending rate: 7%