What your bond really costs, and how to end it early
Every bank has a repayment calculator. Almost none of them show you the number that changes anything, which is what paying a little extra each month does to the years.
The purchase price. Transfer and bond costs are paid separately and are not usually financed.
What you are putting in up front. A larger one often earns a better rate as well as a smaller bond.
The annual rate the bank quoted. Most South African bonds are linked to the prime rate, so this moves.
This is the field worth playing with. Even a small amount changes the term considerably.
Put in the price and the rate. Then add something to the extra payment field and watch what it does to the years.
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Arithmetic on the figures you enter, not a quote and not a credit decision. Ask your bank for the total cost of credit in writing, which they are required to give you, and confirm that extra payments go against capital rather than sitting in a reserve. Our other tools.
Why the extra payment does so much
It is not generosity on the bank’s part. It is how amortisation works.
Early payments are almost all interest
In the first years, most of your instalment covers interest and very little touches the capital. That is why the balance seems to barely move for a long time.
Extra payments are all capital
Anything above the instalment skips the interest and goes straight at the balance. Every rand of capital removed is also every rand of interest it would have generated for the rest of the term.
The effect compounds backwards
Taking capital off early removes interest from every remaining month. This is why a modest extra payment made consistently has a far bigger effect than a lump sum made late.
One thing to confirm with your bank
Ask whether extra payments reduce the capital or sit in an access facility as available credit. Both are useful, but only the first shortens the term, and which one your account does is not always obvious from the statement.
Before you commit to the repayment
A bond is the longest financial commitment most people make. Two things worth checking first.
What does your month actually look like?
Housing much above a third of what comes in leaves very little room when something goes wrong, and something always does.
What the credit actually is
A bond is secured against the house, which is why the rate is low and why falling behind costs you the property.
Questions people ask
- How much does paying extra into my bond actually save?
- More than almost anyone expects, because anything above the instalment goes straight at the capital rather than the interest. On a twenty year bond, a few hundred rand a month can take years off the term and save a substantial amount of interest. Put a number in the extra payment field and look at the years, not the rand.
- Should I take a 20 year or a 30 year bond?
- A longer term lowers the monthly repayment and raises the total interest considerably, because you are borrowing the same money for longer. If a 30 year term is the only way the repayment fits, that is worth sitting with rather than solving with the term. You can also take the longer term for safety and pay it like a shorter one.
- What costs are there beyond the deposit and the repayment?
- Transfer duty where it applies, conveyancing and bond registration fees, and the bank's initiation fee and monthly service fee. These are paid separately from the deposit and are not usually financed, so they need their own savings.
- Why is the repayment my bank quoted different to this?
- Banks add an initiation fee and a monthly service fee, and most South African bonds are linked to prime, so the rate moves over the term. This works out capital and interest only. Ask the bank for the total cost of credit in writing and compare it against this.