Do you want to know how to get fewer years to pay off your first property or how to pay for it quicker? Let’s look at a few ways through which you can do this, pay off your mortgage quicker. For this article, we will assume the property you want will cost R1000 000. We will also assume the repayment term to be 20 years straight without any reduction tactics.
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Raise a deposit:
This is the most important first step. Saving for a deposit will work in your favour because it can serve as an indication to the bank that you are a good personal finance manager. It also reduces your credit risk and exposure and makes it easier for banks to fund your first house.
Lets’s look at what the numbers will look like without a deposit:
- Your monthly instalment will be R7752 over 20 years
- This means, at the current interest rates, your total interest will be R860 480 by the time you finish paying for this bond in 2040.
Who covers the bond and transfer costs:
Another issue to consider here is that your first property will have transfer and bond registration fees. If you do not have a deposit, assuming your first property is R1 million, then you are looking at an additional cost of R55 712 in both transfer and bond costs. If you do not have any cash savings to cover this, you are more likely going to ask the bank to cover this as well. How does this change the numbers?
- Your initial capital outlay increases from R1 million to R1 055 712
- Your monthly instalment increases to R8 200
- Your total interest over the 20 years increases to R910 288
2. What if you raised a deposit?
Lets’ assume you can raise a 10% deposit, that is R100 000 of the purchase price. Without complicating the maths with bond and transfer fees, you have already managed to reduce your loan amount to R900 000:
- Your instalment falls from R7 752 to R6 977 monthly
- You have also now managed to reduce your total interest over the 20 years to R774 480
So, you can already see how the deposit can help you to be able to qualify for a home loan more than when you did not have a deposit.
3. Negotiate the price:
You can also negotiate the price or buy directly from the seller without having to go through an agent. From personal experiences, I have noticed that most agents will increase the selling price by between 6 and 10% of what the seller is asking for. So, when you put your offer, assuming you will be the first one and the seller accepts, put an offer that is between 6 and 10% lower than what the agents told you the house is worth.
The reason for this is because the agents are not your friends. They are in the business of making money through commission and they might want the owner to still get what your actual offer would have been after the agent’s commission.
Assuming the same examples as above, and assuming you have been able to negotiate the price by 10%, this is what the numbers would look like:
- Your purchase price is now R900 000.
- Because you raised a deposit of R100 000, your initial loan amount is R800 000
- Your monthly instalment falls to R6 202 as compared to the original R7 752
- Your interest is now R688 480. What a saving on interest!
4. Negotiate the interest rate:
In the book “Is your thinking keeping you poor,” Douglas Krugger talks about the concept of being able to represent your interest. One example he gives is that of an employer and employee. He asks whether we negotiate employment contracts with employers before we start working. If we do not, he urges us to do so because a contract is just a document that documents the interests of two parties. It is in our best interests to negotiate the terms of the contract that represents our interest.
The same concept should apply to negotiate for interest with the bank. The interest rate you see on those papers is in the banks’ best interests. What is your best interest? It is in your best interest to negotiate a better interest rate with your bank. I negotiate a minus 0.5% on my first house. I am sure you can do the same.
If this sounds like a huge mountain for you to climb, apply to a few banks and use the results of your application for negotiating with the banks to get the best interest rate you can get.
5. Pay extra if you can:
In this article, I referred to some advice I received from my property mentor, let me repeat it here for the benefit of those that have not seen this article yet:
- If you have a high-value vehicle, sell it and put the money into your bond.
- If you pick up even a ten-cent coin, put it into your bond.
- Pay your bond as quickly as possible and get onto your next property, preferably within 5 years.
- If you are renting out your property, make it unique and different from other properties in your location so that you always have tenants and tenants who are willing to pay for whatever you ask for.
Why is this so? Interest on your bond is calculated daily. So, whatever you put into your bond works in your favour by reducing the interest. If you can, and because interest rates are low right now, pay more into your bond as much as you can.
6. Are you self employed?
If you are self-employed, you might have already noticed that it is more difficult for you to qualify for a bond than it is for your employees. My advice for you is this simple, take a salary(have a payslip for it) from your company/business consistently and make sure this salary lands in your account on the same day every month. Secondly, your business and you are two different people. Do not treat your business as your second personal bank account.
7. Emergency fund:
The pandemic has reminded us how important emergency funds or excess funds in our bond accounts are. Most of us had to negotiate for a payment holiday because we did not have an emergency fund or any funds available in our bond accounts. What was the effect of this? Had it not been for the reduction in the interest rates, loan balances and instalments increased. This also implied more interest until the end of the bond because interest rates will not remain this low forever.
Let’s get talking:
- What have you found a challenge when it comes to qualifying for a bond?
- What other tactics have you used to pay off your bond quicker?
Drop a comment in the comment section. I reply to all comments. And even better, others can also cheap in and help. We are all about sharing ideas that can make us grow together.