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Tuesday, 1 September 2020

5 Ways To Hack A Home Loan

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Own it, bond free, in 13 years instead
of 20
For those of us who aren't trust fund babies, a home loan is pretty much unavoidable if you want to buy a house.

And yes, due to the duration of a standard home loan, doing it this way means you are going to be paying a lot of interest - a 20 year home loan means you will pay around double the purchase price of the house after you factor in the interest.


A R1 Million Bond over 20 years with an interest rate of prime (7%) will have a monthly installment of R7,753.

Paying the minimum means the bond is paid off in 20 years (240 months) and the total interest bill will be around R860,000.


So how do you reduce the amount of interest you pay the time it takes you to own your house outright?

1. Have A Deposit

A 10% deposit reduces the bond amount to R900k.

That means the monthly installment is now R6,978 (which is around R775/month less). The total interest bill is becomes R775k (which is R86,000 less than the R1 Million bond.)


A deposit is also a great way of showing the bank you are a good financial planner (since you were able to save up towards a deposit.). It also reduces the banks risk. They are now only lending R900k for something that is technically worth R1 Million. This gives them a bit of a cushion if something goes wrong.

All this means that having a deposit not only saves you a lot of interest, but it also will improve your chances of getting a bond approved and can help you negotiate a better interest rate (which, as you will see next, can save you even more interest)

2. Negotiate A Better Interest Rate

When applying for a home loan, apply at all the banks (not just the people you bank with). Use a bond originator as well. Then wait and compare the banks offers, and negotiate using the best offer you received as ammunition. When you are done, go back one more time and ask the bank if that is their best offer.

This seems like a lot of effort, is it worth it?

Well, even a small reduction in the interest rate of your bond can pack a big punch! A 0.25% reduction on a R1 Million bond reduces the installment to R7604/month and saves you R35,800 in interest!


(You can also improve your chances of getting a better rate by checking and improving your credit score)

3. Pay Extra If You Can

The interest on your home loan is calculated daily. That means if you make additional payments into your bond, it immediately starts reducing your interest bill.

Even an extra R200/month:
  • Saves you about R52k in interest
  • Means your bond is paid off 1 year faster


(You can click for a larger image)

4. Negotiate The Purchase Price / Buy For Less

Negotiating the purchase price of the property and/or buying a house for a little bit less than what you can afford can save you thousands of rands of interest. A lower home loan amount has a huge impact on the total cost of a home loan - especially if you put the savings into the bond as an extra payment.

A R900k home loan has an installment which is around R775/month less than the installment on a R1 Million home loan. If you put that R775/month saving back into the bond:

  • Interest saved ~1/4 Million Rand 
  • Bond paid off in ~16 years


5. The Biggest Hack - Do All Of The Above

What if you managed to:
- Buy for R900k (instead of R1 Million)
- Put down a 10% deposit (a R90k deposit means a home loan of R810k)
- Got your interest rate down to 6.75%
- Put all savings back into your bond and
- Paid an extra R200/month?

Congratulations!

You have just saved yourself R460k in interest and paid off your home loan in 13 years instead of 20!




You're Not Done Saving

And when you done implementing these hacks, and you thought that was it... 

Some of the banks allow you to renegotiate your home loan's interest rate once the loan has been running for a while. If you have been a good payer, and especially if you are ahead of your payments, you can probably get your bank to squeeze out some more interest rate savings for you - but you have to ask (they won't just do it out of the goodness of their hearts!)

I managed to get the bank to lower my interest rate by simply dropping them a mail and asking.

Just be aware that only some banks will renegotiate your rate, some will refuse point blank *cough* Standard Bank *cough cough*. (That's also maybe something to consider before signing up for a home loan)

And finally - if you want to stay on top of your home loan and check out the dent you are making with extra payments, download this home loan tracking spreadsheet and watch how your home loan freedom date gets pulled closer and closer.





Till next time, Stay Stealthy!
 - ~ - ~

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