This is the last in the series of property investment 101. A series of articles that dealt with different aspect of property issues. If you missed any of the articles, please see the prior articles below. Today, we are dealing with the issue of how to pay off your mortgage bond effectively.
- Property Investing 101
- Why buy a property
- The process of buying one
- Mistakes I made along the way
- Getting your house in order/ cleaning before getting a loan
Since the big hairy audacious goal of paying off my bond off in 4 years, I have decided that the sooner I began, the earlier I will finished. The only thing that I have to do is play against the power of compound interest.
Compound interest is what makes borrowing expensive. The bank loan you money, then they charge you interest. The rate of interest that they charge you calculated on the principle amount ( which is soo high in relation to your monthly payment) makes it impossible to make much of a progress in your first few years of the loan. When I ran past the numbers in the amortizationt table, only after 14 years of payment your montage loan will the portion reducing the capital exceed the interest on every monthly payment you make. This means for the first 14 years, more than 50% of the amount you pay the bank will go toward covering the interest.
Capital: The money you borrowed to buy the house. I.e the selling price of the house including an lawyers and bank fees if you do not pay them cash.
Interest: the money the bank charge you for borrowing the capital. This is calculated as a % multiplied by the capital. When it is compounded, the interest is calculated daily and interest to the extent not yet paid attracts more interest
But it need not to be this way. If you would like to pay off your home loan early, all you need to do is to pay a little extra on the loan than the minimum the bank is requiring you to. This is because everything you pay over and above the required payment will go toward reducing your capital portion. Implying that, the following month, your interest will also reduce and since you monthly installment stays the same, a larger portion of your payment goes toward covering capital instead of the interest.
Below is what I have done in the last three months to achieve the four year game plan:
- I have doubled the loan installment. I am only able to do this because I borrowed an affordable amount.
- I rented out the one room in the house and the rental income I also use to pay extra on the home loan.
- Since I no longer drive the Jeep, I used the insurance savings to also add to the home loan account.
- When I do side hustle – last month I assisted someone with assignments and got paid a little something that I also deposited in the home loan account.
- The profit I make from the airtime, electricity and DSTV is also deposited here.
- I got some S &T for travelling with work that I also just dumped on the loan.
These are a few things I have managed to do in month three of having the loan and because of this I have manage to shave off 36 months of repayment. That is 3 years ahead of the game plan. The impact is radical because every cent I deposit in the account goes and attack the capital and with every payment, my loan goes down.
My advise to you is, if you have a homeloan, do not wait after 10 years before you can start making the extra payment. Then your loan will have grown soo much such that your extra payment will no longer have an impact. In addition, if you get a property before getting married, not having kids, use the extra income that you have to make a difference on your home loan.
I hope this article puts into perspective why homeloan will cost you money if you just do what the bank is expecting of you. What are you doing to get ahead of the homeloan game?