The real cost of the bond…
I read with interest the comments from “experts” telling people to resist yesterday’s interest rate by not reducing their bond repayments. This makes a lot of financial sense but the comments from readers of the article clearly shows just how cash-strapped many people are and for many, even this cut will not be sufficient. (Although this is difficult to understand given that we are almost back to where we were just before rates started climbing). Clearly there is a lot of emotion out there…
One of the biggest issues around bonds is that most people have no idea of the time-value of money and as a result have no idea of the total cost of their house over the 20 year period. The table below shows the repayments and total cost on a bond over the full term as well as what the required payment would be if someone wanted to pay their bond off over 15, 10 or 5 years. It also shows the subsequent saving in interest as a result of paying it off more quickly. R1 million bond over various periods @11% interest
Period Payment/Mnth Ttl repayments* Difference Saving
20 years R 10 322 R 2 477 252
15 years R 11 367 R 2 045 621 R 1 045 R 431 631
10 years R 13 772 R 1 653 306 R 3 450 R 823 946
5 years R 21 747 R 1 304 457 R 11 425 R 1 172 795
*this is the total cost of the R1 million bond over the period.
What most people fail to realise is that if they just leave their repayment where it is before yesterday’s cut, they will pay the bond off in just over 16 years and as a result will pay +/-R321000 less in interest. It also makes sense to build in an annual increase in your bond repayment – in much the same way that you have annual increases in your pension, RA or life policy contributions – by putting an annual escalation of 10% on the repayment you would pay your bond off in under 10 years at current interest rate levels and would save more than R825000 in interest!
Remember too, not to let the bank take the premium for the home owners insurance off your bond – you end up paying interest on this amount for the full term of the bond as a result (read the blog It’s so easy to save money!) for more on this.