Your bond is likely your biggest monthly expense – but is it worth adding extra payments every month? There are advantages, but also a few disadvantages to consider, according to Gumtree Head of Property, Barrie Swart.
“The biggest benefit is paying off the interest on the loan faster, which means you will ultimately pay less interest, and the term of the loan will fall, but there are fringe benefits too. Banks will look at your profile more favourably when you next apply for a bond. It will also work in your favour when rates go up.”
There are downsides, but these are minimal, says Swart. “There might be penalties associated with overpaying, particularly if you’ve taken advantage of a special offer, which could outweigh the benefit. It also depends on your personal profile.”
If you have a significant amount of credit card debt or micro loans outstanding, it’s best to put disposable income into those payments rather than a bond. “In general, those debts are more expensive than a bond. It’s also good to have an emergency fund as a home owner. Geyser burst, roofs leak, refurbishments are needed…keeping some money in the bank for a rainy day is important.”
Homeloans fluctuate in balances which changes the amount of interest being added to the loan, which can be an incentive to pay off the bond sooner. Paying 10% extra per month could save four years of repayments and a hefty saving over the life of a loan. Flexibond facilities (or similar) allow easy access to prepaid or surplus funds deposited above the required instalment, which provides ease of mind should an emergency crop up.
“This has additional benefits as well. Surplus funds on a homeloan will perform better than a separate savings deposit and is not taxed as income tax (as some savings accounts may be).”
In general, Swart advises home owners to pay surplus funds into their bonds if all other expenses are covered and all other debts paid off, if you have sufficient insurance to cover your responsibilities and if you have six months’ worth of your salary available to you for emergencies.
“Speak to both your banker and your financial planner to find out whether or not surplus payments is a viable option for you. As with everything, it’s important to look at the bigger picture before making a decision.”