Home loan could be effective savings tool

THIS week the home loan base rate increased from 10,75% to 11% and for many home owners this 0,25% increase is often a hard nut to crack.

There are, however, those customers who also have a small investment or savings account somewhere into which they deposit funds on a regular basis or as they can.

Rather than risk going further into debt and borrowing money this year, home loan customers should consider using their bond facility as a savings tool.

Increasing the repayments on a home loan facility above the minimum requirement will create financial flexibility for home loan owners to deal with during unexpected financial pitfalls.

Most home loan customers underestimate the power of their home loan as a sophisticated money management tool. If managed on a disciplined basis it can give you the financial flexibility to weather tough times.

A home loan is relatively cheap because it is a secured loan which means that the loan is protected by using the home as an asset.

Consumers often resort to using personal loans and unsecured credit to finance unforeseen expenses or when they start experiencing cash flow pressures.

However, given the risk factors associated with these types of loans, the interest rates on unsecured credit are usually well in excess of interest rates on your bond, which don’t make them the best choice when considering ways to borrow money.

To use your home loan as an effective savings tool you will need to pre-pay into your account which means that additional cash must be paid into the home loan account.

This additional cash works for the benefit of the customer by reducing the outstanding balance that they will be charged interest on. If customers consistently repay in excess of the minimum, the loan balance reduces much quicker which has two benefits in that they can pay off the loan sooner or, have access to prepayments in future, if need be.

On a normal, 20 year home loan of N$ 1m, paying the minimum installments at base rate, 11% would cost you N$10 321, 88 per month. Increasing your repayments by 10%, to N$11 354, 07 will allow you to pay off your loan in 181 months, almost five years sooner, as well as give you access to funds of just under N$60 000 within 5 years of keeping up these additional payments.

Your total interest saving under this option would be 25% or N$428 057,74. Obviously, the more paid into your bond, the further the benefits stretch.

Increasing bond repayments by 30%, to N$13 418,44, will give you a N$787 000 saving on total interest paid, and pay off your bond in just over 91⁄2 years sooner than the 20 year term.

Paying in excess of the minimum required repayments, should be a consumers’ first port of call when looking for ways to be financially flexible.

If you start now, you will very quickly create surplus cash in your account that can be used instead of taking out short term loans. The greater the repayment consumers are prepared to make towards their home loan, the lower term they will pay the loan off over, the more interest they will save and the greater the available pre-paid funds that they will have at their disposal.

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