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Wednesday 11 September 2019

Track Your Way To Home Loan Freedom

Are you on "track" to pay off your
home loan early? Punny!  
Buying a house is a big deal. In fact, a house is one of the biggest purchases you will ever make. And then, to add to the enormity, the purchase is almost always funded with debt. This means that once the purchase has been made, a fair chunk of change is going to be sucked up every month by a bond repayment.

It's strange though, within a few months of signing a home loan, you kind of get used to the massive debit order vacating your account each month, and life goes on.

But recently I have caught myself imagining what it would be like if we no longer had that monthly commitment. The almost R10k per month we are currently paying towards our bond would be most welcome back in our wallets!

Coupled with this, is an important factor with regards to our Early Retirement Plan. Our financial freedom hinges on the assumption that we will have no home loan or rental expense by the time 2030 rolls around and we call it quits on our 9 to 5.

So this got me wondering – are we on track to being home loan free by then?

The question sounded like it was time to open Excel. And so I did…

The result was a handy little spreadsheet which I will link to a little further on in the article. The spreadsheet firstly plots the outstanding balance of a home loan over time, using the initial parameters the loan was signed under, and assuming the minimum payments are made each month. Then I added a plot to track the actual outstanding balance of the home loan each month. And finally, I added a projection which would use the latest actual outstanding balance to estimate when the home loan would actually be paid off.

So, for example, a R1 Million home loan taken at, the beginning of March 2019 at 10%, would have an outstanding balance over time which would look a little something like this (click for a larger image):

Yeah, I know, I know, nothing to see here. A 20 year home loan paid off in 20 years.

But the fact that you are reading this article, means it’s highly probable you are well aware of the ugly side of home loans and you are likely making extra payments towards your bond. This means your home loan end date is going to be less than the usual 20 years most people happily accept.

So in the above example, if some extra payments were made, the outstanding balance would decrease faster than if we just plodded along making the minimum payment each month. Let’s say that at the end of September 2019, the outstanding balance was R972,000 (versus the R990,548 the original loan schedule said we should be at).

The chart of the actual outstanding balance, and the estimation of when that balance would reach zero, would look a little something like this (click for a larger image):

The projection shows that this person would be home loan free a year early. Winning!

Getting And Using The Home Loan Tracker

For all my fellow home loan members who want to have a go at estimating your own home loan freedom date, you can download the spreadsheet over here (and I have also added it to the Spreadsheets page.)

Using the spreadsheet is pretty straightforward:
  1. On the "Summary" tab, enter the parameters for your home loan. The input blocks are shaded grey, and include the original loan amount, the starting month of the loan, and the interest rate you signed the loan at.
  2. The spreadsheet assumes that your home loan is a 20 year (240 month) agreement. This should cover most home loans – but if you have a more exotic variant (maybe a 30 year deal) then get in touch and I will see if I can hook you up with a customised version of the spreadsheet.
  3. The spreadsheet then calculates the monthly loan repayment (excluding account fees), as well as the home loan end date (shaded in orange). It also plots a grey line showing the outstanding loan balance over time if the minimum monthly payment is made.
  4. Next, switch over to the “Actuals” tab, and you will see there is a row for every month of the home loan duration. The shaded grey column is where you can insert your actual outstanding balance for each month.
  5. If you already have a home loan that is a few months/years old, then you do not need to enter all the balances for all the preceding months. The spreadsheet understands your dilemma, and you can just enter your last known actual outstanding balance next to the appropriate month. The spreadsheet will sort itself out.
  6. After you have inserted one or more actual values, you can switch back to the “Summary” tab. You will see an updated chart which reflects your actual balance progression (in a solid blue line). This will then be projected forward (in a dashed blue line) until it meets 0. The shaded blue cells will show the actual projected end date, and how many months sooner you will be home loan free (based on the projection).
  7. Going forward, for each passing month, insert your actual outstanding balance and see how it affects your end date (hopefully it brings it closer and closer!)
  8. It's probably best not to fiddle with any of the other tabs in the spreadsheet - I will not be held liable for a 40 year home loan :-P
And then I just want to mention a few nuances around the projection calculation:
  • The projection looks at the last entered actual outstanding balance and then assumes that, going forward, you will continue paying the original loan instalment amount. It uses this repayment value to calculate the forward values and the date at which the balance will reach zero.
  • This means that the projection is a bit of a worst case scenario – I mean if you are ahead of your payments, it is unlikely that you will suddenly stop paying extra and revert back to the minimum repayment. Nope, you will probably continue to go above and beyond. In this case, as time moves on, your due date will creep closer and closer.
  • If interest rates increase or decrease, the bank should adjust your repayment accordingly  (I am assuming you have a variable rate home loan - if not, you really should), which means it shouldn’t affect the end date projection. But if the rates do come down, pump the saving back into the home loan and watch your end date get pulled a little closer with each passing month.
  • If your outstanding balance is higher than where the original loan schedule says it should be, then no doubt your bank is already hounding you for being naughty (and they’ve probably already adjusted your monthly payments upwards, as well as turned the dial up to full blast on the harassment calls and emails). The spreadsheet sides with the bank on this one, and isn't very accommodating of late payers - so you will notice that your projected date does not fall within the scale of the graph.

Home Loan Freedom - A Goal Worth Tracking

Paying off a home loan early is a fantastic goal. The problem is it's a (very) long term goal which requires discipline and consistency over many years. Goals like these often start with a lot of gusto and motivation, but the drive often fades as time moves on.

This is because despite a lot of effort over many months, there is nothing tangible to show for all your hard work. The result is that it doesn't feel like any meaningful progress is being made.

This is where something like tracking yourself on a monthly basis can really help keep you motivated and disciplined. Using a spreadsheet like the one in this article will allow you to "see" the progress you are making which can make it feel more tangible and real. I am hopeful that a monthly check in on your "home loan freedom date" and seeing it moving closer and closer toward you will spur you on and keep you focused on what is an extremely worthy goal to pursue.

So... Am I Gonna Make It?

Okay, back to the question I posed near the beginning of the article - am I going to be home loan free by 2030?

Our home loan was signed back in August 2016 with the following parameters:

Original end date 2036. Certainly not going to cut it in terms of being financially free by 2030. So where do we currently stand?

Now our home loan is a little tricky because we use the access facility as a savings account. This means the actual outstanding balance on the home loan is not a true reflection since some of the money is earmarked for upcoming expenses (things like car services, household maintenance etc.)

But if I factor that in, I estimated that as at the end of August 2019 we owe around R928,000. Plugging that value in next to Aug 2019 of the "Actuals" tab gives me the following chart and end date projection (click for larger images):

So an estimated freedom date of December 2034. Seems I haven't made too much progress (mostly due to us focusing on investing instead of paying off our bond) and we are currently around 4 years off.

But (there's always a but, isn't there):
  1. We recently managed to negotiate our home loan's interest rate lower. Turns out this is actually not that difficult to do all it took was one email (although it does depend who your home loan is with - some banks are more stubborn than others). And guess where the savings from the lower repayments are going? Yes, straight back into our bond. This should shave a few months off our end date.
  2. There have been some rate cuts recently (and prime is now 0.5% lower than when we first signed). Some say there will be more cuts going forward. Either way, we are making a little more headway each month because of this.
  3. I will continue to throw some money into the bond if the opportunity presents itself. Investing will still take priority, but I will try add a little something something whenever possible.
So I am hopeful we will still make it!

Okay, time for me to close Excel and see if I can scrape some more pennies together to put into my home loan...

Till next time, Stay Stealthy!
 - ~ - ~

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