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Saving on your Home Loan

Ways to Save Money on your Home Loan

For most people, purchasing a property is the single largest investment they are likely to make in their lives, and one they cannot possibly afford without securing a home loan.

Fortunately property debt (unlike credit card - and motor vehicle debt) is incurred against a real asset, the capital appreciation of which should offset the interest paid over the term, and leave you with a decent profit should you sell your home after repaying your mortgage.

The largest chunk of the money you pay against your home loan is interest payments and – quite naturally - makes interest the best area to attack if you want to save. There are two strategies you may want to consider if you want to save money on your home loan.

Strategy 1: How low can you go?

Saving on the interest rate imposed on your home loan, is the first strategy. Even a small rates concession will have a major financial impact.

Example:

Home loan: R 1,000,000
Term: 30 years
Interest Rate: 14.5% Repayments: R 12,245.56 per month
Total interest paid over term: R 3,408,401.34

Should you be able to negotiate a 1% rates concession, the picture changes as follows:

Home loan: R 1,000,000
Term: 30 years
Interest Rate: 13.5%
Repayments: R 11,454.12 per month
Total interest paid over term: R 3,123,483.84

You save R 264,918.40 in repayments and R 284,917.50 in interest.

Here are four tactics you may want to employ:

1. Use a mortgage originator when you need to secure a home loan. It is well known that originators can negotiate better rates concessions than individuals. Ensure that your originator has relationships with the major banks, some of the private banks and other non-bank lenders. More quotes necessarily means a better selection.

2. In determining credit risk, lenders use your credit profile as an assessment tool. The better your profile, the greater the opportunity for you to benefit from a rates concession. Credit-profile-based concession rates vary between 0.5% and 1.5%. If you have been diligently paying your home loan for a couple of years and suspect that your profile may have improved along the way, you can approach your lender to negotiate an interest rate concession. It certainly is well worth a try.

3. Renegotiate the interest rate on your existing home loan. The banks will, amongst others, look at the amount of business you conduct with them as well as changes in your credit profile in making their decision.

4. A further tactic could be refinancing your home loan. Approach a mortgage originator to help you obtain quotes and to calculate whether moving your home loan to a different lender would be worth your while.

Strategy 2: Paint by numbers

Developing slightly different payment habits and playing around with the ‘dead’ money you have in hand, could help you save on the amount of interest you pay and could help you to reduce the term of your home loan. Here are four tactics that can help you to achieve these ends.

1. The first tactic is to pay more than you have to. This can either be in the form of paying a couple of extra Rands against your home loan each and every month, or continuing with your higher repayments when interest rates are lowered. This is the potential impact:

Home loan: R 1,000,000
Term: 30 years
Interest Rate: 14.5%
Repayments: R 12,245.56 per month
Total interest paid over term: R 3,408,401.34

By paying an additional R 244.44 every month, the picture changes as follows:

Home loan: R 1,000,000
Interest Rate: 14.5%
Mandatory Repayments: R 12,245.56 per month
Additional Repayments: R 244.44 per month
Total interest paid over term: R 2,561,302.82

Not only should your mortgage term reduce by six years and three months, but you will also save R 845,900.40 in repayments and R 847,098.52 in interest.

2. The second tactic is playing around with the dead money in your other bank accounts. Your home loan interest is calculated on a daily basis. If you move money into your home loan account – albeit temporarily – from ‘dead money’ accounts such as current or transmission accounts, your home loan will be smaller for as long as that money remains in your home loan account. A smaller loan means lower interest charges. To check whether this tactic suits your particular set of circumstances, you will first need to check whether there are deposit and withdrawal fees on your home loan account and what the fees are when you move money to and fro from your ‘dead money’ accounts.

3. The third tactic is to develop different payment habits. Because the banks calculate interest daily, you will save on interest if you pay your home loan a couple of days before month end or if you split your repayments so that you pay half the amount two weeks early and the other half right on time.

4. The fourth tactic is to make lump sum deposits into your home loan account. This tactic is well suited to people who receive a healthy annual bonus and who may want to use some of the money each year to eat away at their home loans. This is the impact:

Home loan: R 1,000,000
Term: 30 years
Interest Rate: 14.5%
Repayments: R 12,245.56 per month
Total interest paid over term: R 3,408,401.34

If you deposit an additional R 6,000 into your home loan account every year on the 1st of January, this is what the picture could look like:

Home loan: R 1,000,000
Term: 30 years
Interest Rate: 14.5%
Repayments: R 12,245.56 per month
Annual lump sum: R 6,000
Total interest paid over term: R 2,179,716.30

Your mortgage term should reduce by nine years and three months, and you could save R 1,234,757.16 in repayments and R 1,228,685.04 in interest.

To conclude

Get into the habit of carefully checking your statements each and every month. Although the lenders are meticulous, mistakes can sneak in. These mistakes could end up costing you dearly.

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