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Paying Extra into Your Home Loan

Paying Off Extra in Your Home Loan

When you originally took out your home loan you agreed to pay the specified installment monthly, for the remainder of the home loan period. You would have agreed to pay back the home loan over a number of years, ranging from 15 to 30 years. A calculation was made taking into account the amount of the loan, the prevailing interest rate and the number of months over which you chose to pay back the loan.

As we all know—or found out—in recent years, every time there is an increase in the interest rate, the bank recalculates the repayment, taking the new rate into account, and you pay more. What happens if you decide to pay more on a monthly basis, or even pay in a lump sum into your bond—without being forced to by rising interest rates—are you allowed to do that? Yes, you may and you should do just that; if you have any extra cash.

Any additional capital you pay into your home loan will save you a huge amount of money in the form of interest if you look at the overall picture, i.e. compared to what you would have paid on the original calculations. Interest on home loans are calculated on the daily balance and capitalized monthly. By paying in extra you will not only save a fortune in interest but also reduce the number of years it is going to take you to pay off your home loan.

On the internet, on any of the banks web sites, or other home loans related sites, you will find calculators that you can play around with. They will show you exactly how much you will save if you make a lump sum additional payment, or increase your monthly payments. You will also see how many years you will shave off the original repayment period. Either way, you’re in for a big surprise when you realize the amount of money you can save by paying off extra on your home loan.

Think of it, 30 years is a long time to be paying off a home loan…a very long time.

Any extra money that you have paid off on your home loan, over and above your normal monthly payments, will reflect on your account as an “in advance” status. Unexpected crisis and financial dramas can cripple many people. If you have paid in extra money you can access this cash in times of need by requesting your bank to grant you access to the additional cash.

This access can be in electronic form, allowing you to transfer money to and from your home loan to your current or savings account. In times of rising interest rates, having a financial buffer like this will give you peace of mind as it can absorb the additional payments required without you actually having to make them. You can even use this as a way to save for Christmas or a holiday.

One of the major banks in South Africa has launched a product that offers you the flexibility to automatically increase your repayments each year, either with a set amount or a percentage increase. You will not be penalized in any way if you need to revert back to your original repayments at any stage.

You should look at making extra payments on your home loan as an investment. If you are paying the prevailing rate, you cannot find a better investment rate around. With the huge fall in stock markets, many people will be returning to saver havens to invest. In South Africa property is still your best bet. Look after yours and protect your investment of a lifetime.

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