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Does paying E100 extra on your home loan matter?

The substantial amount of debt owed on a home loan can often startle consumers making it seem pointless to pay anything extra, as it may take decades to settle the amount outstanding.

By paying E50 extra on a E500 000 Home Loan on a 10.25% interest rate for 20 years, you will be able to pay off your home loan in 19 years and three months, while saving over E26 111.86 in interest that you would have paid to the bank.

Dr Simphiwe Madikizela, says what many consumers don’t realise is that even paying as little as E50 extra on your bond, you can immediately start saving on interest.

By paying E50 extra on a E500 000 Home Loan on a 10.25% interest rate for 20 years, you will be able to pay off your home loan in 19 years and three months, while saving over E26 111.86 in interest that you would have paid to the bank.

He says that in order to understand the impact of extra payments, consumers should first be able to distinguish between payment towards their principal debt as well as interest paid on the principal debt.

For a home loan, the first payment you make would typically be paid towards interest. However, any extra payment you make enables you to lower the principal debt owed. As the principal debt decreases, so does the amount of interest you have to pay.

Madikizela demonstrates the impact of making an additional payment, every month, on a E500 000 home loan at an interest rate of 10.25 % for 20 years:

Recurring extra payment monthly Years to be paid off Savings on Interest
E100 18 years and 8 months E49 933.77
E200 17 years and 7 months E91 913.82
E300 16 years and 8 months E127 859.91
E400 16 years E159 093.56
E500 15 years and 3 months E186 545.30
E600 14 years and 6 months E210 921.07
E700 14 years E232 744.92
E800 13 years and 5 months E252 426.89
E900 13 years E270 280.29
E1000 12 years and 5 months E286 571.73

“You should also consider topping up your extra payments with a lump sum, either from your bonus or tax refund, etc. This will significantly reduce your interest over the loan period.

“Being aware of the impact of making extra payments will help you manage your bond repayments and ultimately ensure that you pay off your bond as quickly as possible,” says Madikizela.

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