The substantial amount of debt owed on a home loan can often startle consumers making it seem pointless to pay anything extra, as it may take decades to settle the amount outstanding…
Dr Simphiwe Madikizela, Head of Special Projects at FNB Housing Finance, says that what many consumers don’t realise is that even paying as little as R50 extra on your bond allows you to immediately start saving on interest.
By paying R50 extra on a R500 000 home loan on a 10,25% interest rate for 20 years, you will be able to pay off your home loan in 19 years and three months, while saving over R26 111.86 in interest that you would have paid to the bank.
Debt vs interest
He says that, in order to understand the impact of extra payments, consumers should first be able to distinguish between payment towards their principal debt as well as interest paid on the principal debt.
For a home loan, the first payment you make would typically be paid towards interest. However, any extra payment you make enables you to lower the principal debt owed. As the principal debt decreases, so does the amount of interest you have to pay.
Madikizela demonstrates the impact of making an additional payment, every month, on a R500 000 home loan at an interest rate of 10,25 % for 20 years:
“You should also consider topping up your extra payments with a lump sum, either from your bonus or tax refund, etc. This will significantly reduce your interest over the loan period.
“Being aware of the impact of making extra payments will help you manage your bond repayments and ultimately ensure that you pay off your bond as quickly as possible,” concludes Madikizela.