Making extra payments on a home loan

[Speedster]

Whether I understood it wrongly (which I did obviously) or not, whether the interest calculations are shown correctly or not...

NOTHING beats opening that first quarterly home loan statement and seeing that you're done paying off interest, and you have now actually started to pay on the principal debt :crylaugh:

Which never happens because you pay interest up to the very last instalment. Our am I missing something here?

 

[snowwolf]

Theres a long term benefit on reduced interest over the period of the bond. No reduction in monthly premium.
Interest amount will more often than not only be reduced if the capital amount decreases. You'd need to request the Institution to capitalise the amount you add into the bond for this to happen. They then recalculate the interest owing based on the reduced capital amount at whatever the rate is, over the remaining period. A R500 per month interest reduction may not seem like much, but add them over the 20 year period, and you looking at some big money.

Also, bonds are calculated on a schedule (as someone shared), that covers the interest portion on the loan before any capital amounts. Reduce the long term interest portion by doing above, and you can pay of the capital amount quicker.

If you can invest and get a greater return on your investment (after fees) than your bond rate, rather put your lump sum into that and add monthly extra to the bond.

Also, consider bi-monthly payments. Some institutions will accept a payment at the beginning and end of the month, or end and middle of the month (total monthly installment / 2). Works out slightly more effective.

 

[Speedster]

Why are you working the interest out on the 50k?

Should it be 875k - 50k as the capital balance on which the interest is calculated?

And that would be why OP is seeing such a small difference as it's actually still a very small chunk of change.

****

I would have worked out total interest with both capital amounts and subtracted them from each other.

Unless this is a shortcut to that same result?

Shortcut to same result. Only working out the difference in interest due to the extra R50k paid in.

From the limited facts available it seems the bulk of the excess cash was only deposited towards the end of the month so the effect on interest for the month is minimal.

 

[savage]

You do, but it still feels great when the amount owning on the statement is less than what the initial loan amount was for.

The first few years, the owning amount goes down VERY slowly because the majority of what you pay is allocated to interest. After a few years however, the interest becomes less and more is paid towards the outstanding debt. Thus, the amounts start getting less a lot quicker.

It doesn't change anything in the calculations, it just looks, and feels much better because you can now actually start to SEE how your debt is becoming less... and quickly too.

Theres a long term benefit on reduced interest over the period of the bond. No reduction in monthly premium.
Interest amount will more often than not only be reduced if the capital amount decreases. You'd need to request the Institution to capitalise the amount you add into the bond for this to happen. They then recalculate the interest owing based on the reduced capital amount at whatever the rate is, over the remaining period. A R500 per month interest reduction may not seem like much, but add them over the 20 year period, and you looking at some big money.

That's what I was talking about yes!

 

[Speedster]

Theres a long term benefit on reduced interest over the period of the bond. No reduction in monthly premium.
Interest amount will more often than not only be reduced if the capital amount decreases. You'd need to request the Institution to capitalise the amount you add into the bond for this to happen. They then recalculate the interest owing based on the reduced capital amount at whatever the rate is, over the remaining period. A R500 per month interest reduction may not seem like much, but add them over the 20 year period, and you looking at some big money.

Also, bonds are calculated on a schedule (as someone shared), that covers the interest portion on the loan before any capital amounts. Reduce the long term interest portion by doing above, and you can pay of the capital amount quicker.

If you can invest and get a greater return on your investment (after fees) than your bond rate, rather put your lump sum into that and add monthly extra to the bond.

Also, consider bi-monthly payments. Some institutions will accept a payment at the beginning and end of the month, or end and middle of the month (total monthly installment / 2). Works out slightly more effective.

The capital amount decreases the moment you pay in excess cash, thereby decreasing the interest immediately.

Also, your monthly repayment includes an interest portion as well as a capital portion from the very first to the very last month. At the start the interest portion makes up the bulk of the sum, with the capital component only very small. As youv gradually pay off the capital the interest portion decreases and the capital portion increases until towards the end you are paying hardly any interest anymore (due to the much smaller outstanding capital amount). Any extra payment will decrease the outstanding capital and thereby decrease the interest calculated for that month. Assuming a constant repayment amount (as most banks do) that means you'll simply pay off even more capital each month.

 

[snowwolf]

The capital amount decreases the moment you pay in excess cash, thereby decreasing the interest immediately.

It should, but not all institutions do this by default, especially if it's an access or flexi bond. Not great, but sadly the reality.
Personally, a phone call or automated email to request it monthly (as a paper trail or record of you having done so), far outweighs presuming it, and any potential changes in how the interest is calculated, as well as possible rate fluctuations.

In an ideal world, you are right. But these are banks at the end of the day...

 

[snowwolf]

This and the fact that it's over 20years. Unless it's a couple of 100k.. it wont make a substantial difference.

Not entirely true.

As an example:
OP takes out the bond today for 990k.
At prime (10.5%), over 240 months, the total interest is around: R 1,382,150.61
Total repayment amount over the period is around: R 2,388,566.61

If OP decides that they want to add
R500 per month, from today, the interest saved could be: R 230,149.97 over the period
R1000 per month, from today, the interest saved could be: R 386,820.71 over the period.

Furthermore, the total loan period could be reduced in both instances to 207 and 183 respectively. That's almost 3 and 5 years.

If OP doesn't add monthly, but does a single lump sum of R50 000, 1 year from today:
The interest saved over the period of the bond could be around: R 267,230.49
The period of the bond could be reduced by 32 months.

As much as these are indicative amounts, I'm not sure "it wont make a substantial difference" is valid.
Be it R230k or R267k, it is still a significant saving, as well as a reduction in the term of 30 months+

Yes, one can argue that the present value of future funds can come into effect, in which case don't pay the bond but invest the money elsewhere, but that would mean greater risk exposure.
A "guaranteed" reduction in the term and total repayment amount vs higher potential returns on a capital investment may seem like good odds. It should be carefully considered though.

My 2c.

(Disclaimer: This isn't financial advice, just a depiction of the possible impact of various decisions on a bond repayment amount and term. Other factors may influence this, including rate changes, increased service charges etc)

 

[yebocan]

Not entirely true.

As an example:
OP takes out the bond today for 990k.
At prime (10.5%), over 240 months, the total interest is around: R 1,382,150.61
Total repayment amount over the period is around: R 2,388,566.61

If OP decides that they want to add
R500 per month, from today, the interest saved could be: R 230,149.97 over the period
R1000 per month, from today, the interest saved could be: R 386,820.71 over the period.

Furthermore, the total loan period could be reduced in both instances to 207 and 183 respectively. That's almost 3 and 5 years.

If OP doesn't add monthly, but does a single lump sum of R50 000, 1 year from today:
The interest saved over the period of the bond could be around: R 267,230.49
The period of the bond could be reduced by 32 months.

As much as these are indicative amounts, I'm not sure "it wont make a substantial difference" is valid.
Be it R230k or R267k, it is still a significant saving, as well as a reduction in the term of 30 months+

Yes, one can argue that the present value of future funds can come into effect, in which case don't pay the bond but invest the money elsewhere, but that would mean greater risk exposure.
A "guaranteed" reduction in the term and total repayment amount vs higher potential returns on a capital investment may seem like good odds. It should be carefully considered though.

My 2c.

(Disclaimer: This isn't financial advice, just a depiction of the possible impact of various decisions on a bond repayment amount and term. Other factors may influence this, including rate changes, increased service charges etc)

That is why i dump an extra R1000 into the bond each month...save on interest and redecution of term

 

[Splinter]

Hi everyone

I have been making extra payments into my home loan for the past 5 months and have also transferred all my savings into it. It's an FNB flexibond, so i still have access to all my surplus payments.

My question is about the interest i should be getting charged on the loan, since i now have quite a large surplus amount. I was under the impression that the amount of interest i will be charged will be less as it will be calculated based on a lower value.

However, looking at my statement, my interest amount is basically the same as before i started making extra payments. Am i doing something wrong? Am i supposed to call the bank to reduce the amount? I thought this was done automatically.

Edit:
It's currently a 50k surplus. Original loan amount of 990k, amount outstanding is about 895k.

Give me the remaining years on your bond, and the interest rate, and I can work out how much this R50k (just assuming you don't pay anything extra ever in to the bond) will save you in interest over the lifetime of the bond..

 

[themba990]

Theres a long term benefit on reduced interest over the period of the bond. No reduction in monthly premium.
Interest amount will more often than not only be reduced if the capital amount decreases. You'd need to request the Institution to capitalise the amount you add into the bond for this to happen. They then recalculate the interest owing based on the reduced capital amount at whatever the rate is, over the remaining period. A R500 per month interest reduction may not seem like much, but add them over the 20 year period, and you looking at some big money.

Also, bonds are calculated on a schedule (as someone shared), that covers the interest portion on the loan before any capital amounts. Reduce the long term interest portion by doing above, and you can pay of the capital amount quicker.

If you can invest and get a greater return on your investment (after fees) than your bond rate, rather put your lump sum into that and add monthly extra to the bond.

Also, consider bi-monthly payments. Some institutions will accept a payment at the beginning and end of the month, or end and middle of the month (total monthly installment / 2). Works out slightly more effective.

This.

Put money in an index tracker. Wait 10, or so, years. Profit.

 

[notinterested]

Give me the remaining years on your bond, and the interest rate, and I can work out how much this R50k (just assuming you don't pay anything extra ever in to the bond) will save you in interest over the lifetime of the bond..

16 years and 7 months remaning. 9.65%