How to save money using your home loan and compound interest!
All home loans use compound interest, and to understand how to save money you need to understand how compound interest works:
Compound interest takes into account the total balance owed, rather than just the principal amount of the loan. IE they take into consideration your balance and the interest they charge each month to work out your monthly instalment.
This in a nutshell means that your instalments will pay off the interest first before they pay off what you owe on the loan. The only way to reduce this is to pay additional money into your home loan every month or as often as you can. And the more you pay each month the less interest you are charged and the quicker you pay off your home loan.
For example, if you took out a bond of R1,500,000 for 20 years (240 months) at an interest rate of 10.75%
Your Monthly Repayments would be R 14,475 per month
Your Total Repayments would be R 3,473,957
The Total Interest you would pay would be R 1,973,958
But if you were able to pay an additional R1000 every month towards your home loan
Your Monthly Repayments would be R 15,475 per month
Your Total Repayments would be R 3,074,725
The Total Interest you would pay would be R 1,574,726
And you would save a whopping R399, 232 and instead of paying off your loan over 240 months, you would pay off your loan and be debt free in 199 months.
Also, the home loan rate is higher than any savings or investment account and it is not taxable as it is interest saved- not earned
So if you have extra cash lying around to pay off an additional amount each month it will save you money and will free up your finances quicker so that you can buy your next home with another home loan from Select a Bond
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