Now that you have bonded your new property, by getting a home loan from a bank, the next step in your journey is to turn your bonded property into a paid-up asset. One of the misconceptions about buying property is that by bonding your new house, you own it outright. However, you only own the property once the bond is fully paid, and the title deed is in your possession.
By owning your property, it is an asset you can choose to re-sell; rent out for passive income, or even borrow against for other investment endeavours. All these options can be available to you by paying off your property in just seven years. That is about the same time it would take you to pay off a financed car.
To realise the benefits of having your property paid off, you can follow a simple blueprint; that starts with getting to understand the power of compound interest.
So, what is compound interest? Simply put, it is the multiplying of the initial capital plus accumulated interest over a specific period. To explain the impact of compound interest over time, let us do a quick experiment.
If I gave you the option of taking R1m or 1c doubling for the next 30 days, which would you choose? Most individuals would probably take the R1m without much thought. Well, they would be wrong and would have lost out on a further R4.368m, as at day 30, the value would be R5,368.709.12.
The compounding effect of interest over time accelerates and creates a bigger impact as time goes on. How this relates to the home loan repayment on your property is that 85% of your monthly instalment goes towards paying interest in the first 15 years of the home loan and only 15% goes towards paying down the debt owed.
The trick is to reverse this impact and activate the power of compound interest in your favour. You can do this by simply adding 15% over and above your monthly instalment and watch as the compounding effect of 15% doubling itself monthly reduces the debt owed over the next seven years. This happens because the bank can only charge interest on the amount owed less the added 15% you pay each month.
Provided you continue to keep the pre-paid funds in your home loan account, this cumulative impact over the years will enable you to repay your home loan in just seven years!
Even if you cannot afford the extra 15% but still have a desire to pay off your bond early, there are still significant benefits to paying more than the required monthly amount.
The obvious benefit is that you will save thousands of rand in interest charges, and you will have more equity (ownership) of the property.
The blueprint to paying off your house in seven years or less than the 20-to-30-year term is as follows:
Start by having an access bond facility that enables you to transfer more funds into your bond account.
Decide on how much you can pay into your bond over and above the monthly instalment.
Be consistent in your repayments to allow for compound interest to take effect.
Observe each month as the interest charged on your home loan drops and more of your debt is paid off at the same time.
You will then see your pre-paid funds build up in your account and you save on interest charges.
The challenge with consumers today is that meeting financial obligations is already a significant commitment that requires discipline. Therefore, consistently committing to the extra 15% is not easy in practice.
However, consumers who can afford it can save themselves over 10 years of interest charges and harness the power of compound interest on their way to becoming property owners. It is worth the effort, give it a try!
• Akinnusi is CEO of MortgageMarket.co.za
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