Make sure that you have as little short-term debt as possible. This will ensure that you have a good credit record when applying for good debt. Good debt, for example, would be a bond on your property or on a second property. Always pay surplus cash or bonuses into your home loan account. This will save on interest and you will own your property sooner, helping to create long-term wealth.
Let’s look at the effect of paying off a 20-year home loan faster than the life of the bond. On a bond of R1 million with an interest rate of 10 per cent, your repayment will be R9 650.22 a month and if you pay only the minimum required every month for 20 years you would have paid R2 316 054 in total for your R1 million house, meaning you paid interest of R1 316 054.
If you pay an additional R2 350 per month into your bond, for example, you will pay the house off in 12 years and will save R601 645 in interest. But where do you find the R2 350? Apply the ideas below to your own situation and see how much you can come up with every month.
- An annual bonus of R28 200 divided by 12 = R2 350 (paid directly into the bond after it’s received).
- If you settle credit card debts you could redirect the monthly repayments into your bond.
- What if you don’t buy that new car? Once you have paid off your existing one, use what you would have paid in instalments for your home loan.
- If you do your budget every month and trim here and there, you will be able to reduce expenses and redirect that money into your home loan instead. I advise all my clients to find ways to save on expenses and to invest whatever they can save.
In addition to saving on interest, you will build up capital value. If you have an access bond, you can use this capital in a life-threatening emergency, without having to sell any assets. By year two you will have already built up an extra R96 972 in cash, which is very handy. By year four, you will have more than R200 000 on hand.
If you have never had a credit history, now would be a good time to get one. You don’t have to go into debt to get a credit history. Credit bureaus keep a record of how you handle credit, listing both positive and negative behaviour. A cell phone contract will help build your credit history, so you don’t need to apply for five credit cards. If you rent a property for a year and you pay the rent consistently and on time, your estate agent can list you on TPN Credit Bureau as a good payer.