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Paying extra into your bond: what it saves
Every extra rand you pay into your bond goes against the capital you owe, so the bank charges interest on a smaller amount from then on. Over many years, even modest extra payments can shorten the bond and save a large amount of interest. The earlier you start, the more it saves.
How extra payments work
Interest on a bond is calculated on the outstanding balance. In the early years, most of each instalment goes to interest and only a small part reduces the capital. When you pay extra, the whole of the extra amount reduces the capital. A lower balance means less interest next month, which means more of your normal instalment goes to capital, and the effect builds on itself.
You then have two choices, depending on your bank:
- Keep your instalment the same. The bond finishes sooner. This is usually where the biggest saving lies.
- Lower your instalment. The bond ends on the original date, but your monthly cost is lower. This gives you breathing space, but saves less interest.
A simple way to see it
Imagine you pay an extra R500 every month, or one extra payment of R10 000 a year from a bonus. The exact saving depends on your loan amount, your interest rate and how many years remain, and those differ for everyone. The extra bond repayment calculator does the sum for your own figures. Try several amounts, and see how much time you shave off.
A few points hold in every case:
- Money paid early in the bond saves more than money paid late, because it stops interest running for longer.
- A regular small amount can beat a single large amount that comes too late.
- The higher your interest rate, the more each extra payment saves.
Check with your bank first
Banks differ in how they handle extra money. Ask these questions:
- Can I pay extra at any time, and are there any fees or limits?
- Does the extra money reduce the capital straight away, or only at month-end?
- Can I get the money back later if I need it? Some bonds have a facility for this, as explained in access bonds and re-advances.
- Will the instalment stay the same, or fall?
- If I have a fixed-rate loan, are extra payments restricted?
Always pay with a clear reference that the money is an extra payment toward the bond, and check your statement afterwards to confirm it was applied as you wanted. Do not assume it happened.
The National Credit Act also allows you to settle a bond in full at any time. On a large agreement such as a home loan, the lender may add an early termination charge, which the Act caps. Your bank’s rules on partial payments may differ, so read your agreement.
When extra payments are not the best idea
Paying down the bond is a sound use of money, but it is not always the first priority. Think about these before you commit:
- An emergency fund. If you pay everything into the bond and then lose your income, getting the money back may be slow or impossible. Keep a few months of expenses in an accessible account first.
- More expensive debt. Credit cards, store accounts and personal loans usually cost more than a bond. Clear those first.
- Other goals. Retirement savings, insurance and education costs may deserve a share of the money. For advice about tax or investments, talk to a registered adviser.
- Your own comfort. Some people sleep better with a lower balance. Others prefer the freedom of cash on hand. Both are reasonable.
Easy ways to find extra money
- Pay a fixed extra amount on payday, so you never see it.
- Put part of any bonus, tax refund or gift toward the bond.
- When your income rises, keep your old spending and pay the difference into the bond.
- If interest rates drop and your instalment falls, keep paying the old amount.
What to do next
Open the extra bond repayment calculator with your own figures. Then ask your bank how extra payments are handled, and set up a monthly amount you can keep up. If you are still choosing a loan, compare terms in 20-year or 30-year bond.
This article is general information for South African readers, not legal, financial or tax advice. Rules and rates change, so check your own situation with an attorney, your bank or a tax practitioner. Our property calculators can help you work out the numbers.