A home loan can be a powerful asset to have if you are looking for cheap, flexible credit explained Ewald Kellerman, head of sales at FNB Home Loans this week. “A home loan does not just enable a person to buy a property, but can be a very useful debt instrument or even interest savings mechanism that stretches far beyond an initial property transaction,” he said.
Kellerman added that consumers may not always realise the power of a home loan and could be discouraged by the relative long term of the repayment period. “At the start of a 20 year credit agreement, it may seem that there is little incentive to accelerate the minimum repayment, because one initially sees so little visible benefit in terms of a reduction in the capital amount outstanding. However, changes in the repayment value in the early stages of repayment of the loan could significantly affect the total cost of the transaction. Small changes in the way a home loan is managed can make a significant difference down the line,” he said.
So what is a home loan ideal for?
A home loan can be used in a variety of ways points out Kellerman. Typically, it can:
1. Give you better interest on your savings: “Any surplus funds deposited into a home loan will perform better than a separate savings deposit that attracts a lower rate of interest,” said Kellerman. “Instead of opening a separate savings account and earning interest on the balance, the borrower will pay less “net” interest (i.e. interest paid minus interest received) if the money is deposited to reduce the outstanding home loans balance. Additionally, earnings on a savings account may be taxed as income tax (certain exclusions apply), whereas a reduction in expenses on your interest repayment does not attract the same income tax.”
2. Be used it to consolidate your debt: Store cards, personal loans and other types of credit can be a lot more expensive than a home loan. You can increase the value of your bond by paying off other loans and this could significantly reduce the total amount of interest you pay on your debt. But you have to be careful using this strategy as you don’t want to overextend on your home loan to the extent that you can’t pay that off anymore. You also don’t want to be in a position where you’ve borrowed more than what your home is worth. This is referred to as ‘negative equity’.
3. Fund major purchases such as a car or your holiday: “Where there is enough equity in a bond to buy a vehicle with the surplus, the rate of interest charged could significantly be reduced by funding the purchase via the home loan instead of another line of credit. Similarly, other lifestyle expenditure such as holidays can be funded from the home loan account instead of through the often more costly short term debt,” explained Kellerman.
Paying off your home loan
As with any loan, the quicker you pay it off the better for you. A home loan is no different and you could save a lot of money in the long run if you put a deposit down on your home or put extra money towards your mortgage every month.
“As little as a 10% additional payment per month could save approximately four years of repayments and R250 400 in interest on a R1 million loan over the life of the loan. These calculations have been based on the current level of interest rates. The additional repayment is immediately set off against the capital value of the loan, thereby reducing interest paid,” said Kellerman.
He added: “Depositing 10% of the purchase price upfront without reducing the repayment can decrease the time it takes to repay the entire loan by four years and three months, and save a approximately R452 000 in interest charges throughout the life of the loan.”