SIMON BROWN: A paid-up house in eight years? It’s possible

I wrote last week about your credit score and how a good score increases your chances of not only securing a loan but potentially also getting a better rate.

A deposit can also improve your interest rate on a loan, and it saves you money.

Say you’re buying a home for R1m and want a full home loan from your bank. If it’s approved, the bank will end up lending you the R1m with a matching asset of R1m should you default and not repay the loan. This does not leave the bank with much wriggle room to try to break even on the bad debt.

So, say you pay a deposit — in this case, of R500,000: you’re buying the same asset but the loan (the risk) is only half of the value of the asset. This puts you in a stronger position for a better rate.

Staying with the R1m home loan, at the current prime rate of 9.75% that will cost you R9,485 a month, and in total over the life of the loan you’ll pay R2,276,440. You’ve paid more than the home just in interest.

But if you don't have half a million lying around for a deposit, even a 20% down-payment will reduce your monthly payments to R7,588 and the total payments will be R1,821,152. That R200,000 deposit has saved you R1,897 a month and R400,000 over the life of the loan.​

But now let’s get really clever. Even though you’ve made a 20% deposit, you can still pay R9,485 a month as if you hadn’t made the down payment. It means you’ll pay the loan off in just under 12 years and you’ll save almost R900,000 in interest.

Over the 12 years of paying off your home loan, your monthly payments remain the same, and as you’re paying more, interest rate increases (unless they go bananas, which is unlikely) aren’t a worry.

But your salary surely increases over the period too. So, every year, increase your bond repayments by your salary increase. If we assume a 6% annual salary increase, you’re paying off your home loan in under nine years, and the total interest bill is now just a couple hundred thousand rather than the R1.2m, with no deposit and no increased payments.

The last trick is a small but important one. Typically, our home loan debit order goes off our bank account on either the last or the first day of the month. Remembering that interest is calculated daily, move the debit order to the day you receive your salary every month. Even if the debit comes off on the 28th, you’ll save a little more — and if you’re being paid on the 25th you can probably slice another year off the duration of the loan just because you have been paying a few days earlier.

This takes your home loan duration to about eight years, which is also the period the average South African lives in a home they’ve bought before moving and starting the whole process again.

Of course, if you’ve stuck to your guns and followed the above approach, by that time you’ll have a paid-off home, and have a huge deposit for the next one if you choose to move. Or you can stay where you are and enjoy the monthly freedom that living in a paid-up home brings.