What would be the best to pay off House/Car debt

[Acid0]

This is a two question, question

So we decided to throw all our disposable income at long term debts to pay off the car and house quicker.
We are in the position now to do this so I was wondering what would be the best thing to do.

Question 1
Car debt.
The car is more of a short term and is the same as the house's interest.
So we decided to pay off the car in less than a year (still 4 years on the loan)
If I am looking just at the settlement amount it seems that it will be easier to put all the money in a 30 day account(for in case something seriously happen and we need cash) and not a short term investment.

So it will be cheaper to just save the lump sum until we have enough and pay off the car in one payment, thus maiking the settlement amount more as the debt amount is more at that point.

Question 2
The house.
The loan was taken out over 20 years three years ago.
So after the car has been settled we will use the same amount plus the mortgage amount.
(For example we saved 4K(Cash) + 6K(monthly installment on car) = 10k) to pay off the house.
This is where I am a bit lost.

Will it be better
Keep the twenty year loan period and pay monthly mortgage amount plus 10K from above saving every month.
or
Keep twenty year loan period and put every year a lump sum down on the house.
or
Lower the loan period to 5 years and pay as normal every month settlement as prescribed by the bank?

Keeping it twenty years obviously they keep the interest rate worked out over twenty years and you pay that off and over five years you pay a lot less interest.

So my real question will be, what is the best way to pay off the home loan the quickest and cheapest?

 

[saturnz]

its better to make the payments as soon as you can as opposed to annual lump sum payments because interest is calculated every second or some ridiculous interval

I paid my bond off in four years, I was pretty aggressive in the approach, I basically threw everything at it.

 

[gimpex]

It's calculated on daily balance so yes. The sooner you make the deposit the better.

 

[Hendrix]

I don't think you can change the period to 5 years after you've agreed to the bond,but you more than welcome to just pay it off in 5 years, which is the same thing anyways.

 

[BlindMelonChitlin]

Seems simple - If you find an investment that offers a higher % return than your home loan interest rate, then put all you can into there and less into the home loan as long as it (the return on investment) is beating that home loan interest rate.

If you have multiple debt accounts, kill the ones with higher interest rates first. Any investments that beat the interest rate charged on your loans should be priority. Remember to factor in tax on interest earned.

Lastly, factor in the value of cashflow - how quickly can you get to your investments if you need them? Seems simple but can be complicated.

 

[Acid0]

Seems simple - If you find an investment that offers a higher % return than your home loan interest rate, then put all you can into there and less into the home loan as long as it (the return on investment) is beating that home loan interest rate.

If you have multiple debt accounts, kill the ones with higher interest rates first. Any investments that beat the interest rate charged on your loans should be priority. Remember to factor in tax on interest earned.

Lastly, factor in the value of cashflow - how quickly can you get to your investments if you need them? Seems simple but can be complicated.

So far we only have the house and the car as debt so we are good on the debt side at this stage.

So what you are saying is that I need to fin an investment that actually makes more than 10% (lets just say that is my interest on the house and the car) and rather invest the money until I have enough to pay the house and car off?

Has anyone paid their house of sooner and if yes was there a settlement amount or just the amount that was outstanding plus the interest on that day

 

[SauRoNZA]

Best way would be to dump it in your bond so that you lower the capital balance. Same would apply if there was only a car loan. You don't want to save it elsewhere and lump sum it unless that saving is higher than the interest rate of the loans which is unlikely.

So save it in the bond, when the excess loan value reached the settlement of the car then settle it from the bond excess and then carry on pumping money into the bond.

That's assuming the interest rate is the same. If not pay the one with highest interest off first.

 

[SauRoNZA]

So far we only have the house and the car as debt so we are good on the debt side at this stage.

So what you are saying is that I need to fin an investment that actually makes more than 10% (lets just say that is my interest on the house and the car) and rather invest the money until I have enough to pay the house and car off?

Has anyone paid their house of sooner and if yes was there a settlement amount or just the amount that was outstanding plus the interest on that day

No.

Nobody is "investing" while they have outstanding debt (pension and RA excluded) as usually those debt far override the investment.

So you settle the debt first, the do the investment.

I also don't understand your settlement question on the home loan. You always need to pay the capital balance. So if you finish early it means your inputs nullified the capital balance so the loan is wrapped up.

 

[akescpt]

Best way would be to dump it in your bond so that you lower the capital balance. Same would apply if there was only a car loan. You don't want to save it elsewhere and lump sum it unless that saving is higher than the interest rate of the loans which is unlikely.

So save it in the bond, when the excess loan value reached the settlement of the car then settle it from the bond excess and then carry on pumping money into the bond.

That's assuming the interest rate is the same. If not pay the one with lowest interest off first.

not highest?

 

[SauRoNZA]

not highest?

Sorry yes, will fix now.

Thanks.

 

[me_]

I assume your bond is an access bond. If so, I would rather put the money there as you still have access to it. When life happens, you can access any savings in the bond at bond interest rates - not have to go out and secure a short term loan at short term interest rates.
If the interest on your car was more then I would recommend paying that off first - it does help a lot with cashflow too, but having the money accessible in the bond is probably more beneficial.

As far as reducing the terms of your bond, I wouldn't do it. Rather pay the extra in and use it as a savings account. Also, if you want to do some alterations in a few years, you can use the savings in your bond rather than having to go out and register a new one or change the terms of yours.

 

[BlindMelonChitlin]

I assume your bond is an access bond. If so, I would rather put the money there as you still have access to it. When life happens, you can access any savings in the bond at bond interest rates - not have to go out and secure a short term loan at short term interest rates.
If the interest on your car was more then I would recommend paying that off first - it does help a lot with cashflow too, but having the money accessible in the bond is probably more beneficial.

As far as reducing the terms of your bond, I wouldn't do it. Rather pay the extra in and use it as a savings account. Also, if you want to do some alterations in a few years, you can use the savings in your bond rather than having to go out and register a new one or change the terms of yours.

What he said and ignore those who say you won't find an investment that gives you the same return as your bond is costing you in interest - 15%+ is not hard, the gotcha is they are usually longer term. I Seriously advise seeing a reputable broker and present the options you're thinking of to him.

Also, don't forget that houses cost maintenance - and you may want to enhance it - it's almost always more than just the bond... All I'm saying is don't be disappointed if your bond looks good before you en up spending that money again. Hopefully your means grows over time too.

As for investments, maybe go for shorter term investments such as unit trusts (5 years or so) so that you can access it if necessary.

 

[bro-da]

No.

Nobody is "investing" while they have outstanding debt (pension and RA excluded) as usually those debt far override the investment.

So you settle the debt first, the do the investment.

I also don't understand your settlement question on the home loan. You always need to pay the capital balance. So if you finish early it means your inputs nullified the capital balance so the loan is wrapped up.

^This

 

[BlindMelonChitlin]

^This

If your bond interest rate is 10% pa and you find an investment that returns 20+% over a 10 year period, how is that not an 'investment'??

 

[saturnz]

If your bond interest rate is 10% pa and you find an investment that returns 20+% over a 10 year period, how is that not an 'investment'??

in this environment its going to be difficult to find financial vehicles that give you better returns than the savings on your bond

even hedge funds are closing and giving money back to investors

 

[Acid0]

We have bought a big house in a good area and good schools, that will be the family house for the next 20 - 30 years anyway.
So we are not planning on moving any time soon. The little one is still small (almost two) and thus gives us a bit of a gap of time to play around in right now.

The goal that we have set and will get to in the next four - five years is to pay of any debt (this means the car and house).
There will be no additional renovations done before hand, and anyway any renovations or alterations will happen with cash and not more debt when both is paid off.

So now is just the question how to do it the quickest without paying more than we should.

I will need to find out if my home loan is a flexi account and if not is it possible to make it one with any penalties?

 

[bro-da]

If your bond interest rate is 10% pa and you find an investment that returns 20+% over a 10 year period, how is that not an 'investment'??

if you could find something that gave you 20%+ over a 10 year period. then i do agree. the 10 year period is they key because the compounding of the 20% on the investment vs the 10% on the bond would be substantial.

But it doesnt seem likely to achieve 20 %+ pa consistently.

The reason why i agree with SauronZA is that 10k paid into the bond account to reduce the loan amount is an implicit guaranteed 10% return on said money. Whereas if the 10 k is invested elsewhere the person will need to get at least 10% (which is not guaranteed) just to break even. so if you can get a 15% investment you will be netting only 5%. Again if there is compounding over many years it's a slightly different story.

EDIT: unless an investment with MMM is on the cards

 

[ichocolate]

My question is not really answered here, i would like to ask it in this same thread, please.

If i have money in a bond which i can use to pay off 50% of my car, then is this a good idea?
If i did this i would have no savings at all left over, besides some coins i have maybe valued at 30k.
The house is a longer term and the car a shorter one, but the car is at 2% higher than my house.

Please give me suggestions here , what is the best approach here , please?

 

[bromster]

This table shows a R2m bond over 20 years.

The first column shows the total amounts paid off if you don't pay it off early.

The second column shows what happens if you pay an extra 3k per month. This saves you 6 years on your bond, 971'000 in interest, 5000 in fees

The third column is OP's option of paying an additional 10k per month. This saves you a whopping 1.7 MILLION in interest over 9 years, saving you 11 years off your bond and 10k in savings.

Show me an investment that can beat that.

 

[reactor_sa]

In most countries the best way to pay off a bond or car is to get a job. In south Africa it's much quicker to join the ANC and have the Gupta pay it off for you, or knock over an ATM, hold up a cellphone or jewellery store, or hijack a few cars.