POST-BUDGET BLUES? GET INTO THE BLACK
Category Advice
There’s only one way to bullet-proof yourself and your family. Pay off your debt. Here’s how to pay off your home loan in 7 years...and it’s way easier than you imagine!
Credit: www.justonelap.co.za
The standard rule with debt is to pay off the most expensive debt first, like those high interest-bearing credit or store cards.
Nobody’s suggesting you work miracles, just choose the most crippling card, and pay it off as swiftly as you can. Yes, you may have to forgo other luxuries for a while, but when you’ve achieved what you set out to do, your money is yours. It’s not owned by a host of others every month.
But most satisfying of all, is paying off your mortgage bond. In good times and bad, it provides a strong sense of security because you know you have a home that nothing and nobody can touch. Your home is truly your own.
But can you do it in seven years? Oh yes, it’s very do-able, and far easier than you might think. You do need to have a little extra cash every month – but only a little – so tighten that belt slightly, and the long-term benefit is most rewarding.
It’s not just about ridding yourself of those monthly instalments either. If you’ve paid off this home loan in seven years, you have a paid-up asset, all of that being equity. Unlike those who’ve only being paying what they were committed to – those early years of home loan repayments are largely only paying off the interest – when you sell after seven years, you will effectively be 85 percent better off than you would have been.
Nothing small about that.
Let’s look at it.
You have a 20-year home loan. Your assumption is going to be that to pay it off in seven years, you’re going to have to make up roughly two thirds of the time by paying an additional two thirds more each month.
Wrong. That’s not how compound interest works.
To pay off your bond in seven years, takes five main steps.
Step one: From the very first instalment of the FIRST YEAR of your 20 year home loan, you pay an extra 10 percent. If your instalment is R10 000 a month, you pay R11 000 a month for a year.
At the end of that FIRST year – if you only continued with this process as described - you would have reduced your home loan down to 15 years.
Five years saved.
Step two: Let’s assume your salary goes up by inflation - a 6 percent salary increase. Take the R11 000 you’re now paying on your bond, and increase that payment by 6 percent. Note – you don’t pay your 6 percent salary increase into your home loan, you only pay 6 percent of your revised bond repayment of R11 000 (R720).
And you do this annually.
That will take your home loan down to 10 years. You’ll have halved your bond repayment period.
Step three: Pay your home loan before the 1st, 2nd or 5th of the month. If you get paid on the 25th, pay it then.
This will bring it down to seven to eight years.
Step four: It’s said that each of us should have three to six months’ living expenses tucked away safely for a rainy day. If you do have that, put it into your home loan. Let’s say you have R100 000 worth of savings, don’t put it into a 32-day call account or fixed deposit – by doing it this way, you’re effectively earning that interest rate on that money.
Step five: If you get a 13th cheque, treat it as another month’s salary. If you can put the entire cheque into your home loan, wonderful; but if not, pay in the same percentage you’ve been paying for the preceding 12 months.
It’s really not that hard. It takes discipline, and determination, but to say it’s worth it is a massive understatement. You’ll sleep a great deal easier in a home that’s really yours.
Author: Anne Schauffer
