How to save R415,000 on your bond by simply doing ‘nothing’

One of the best strategies for long-term savings is to pay off your home loan (bond) as quickly as possible instead of spreading it out over the entire 20- or 30-year period.

This is typically achieved in two ways:

1. Keeping your monthly payments the same even after interest rate cuts
2. Investing any extra funds you might have into your monthly bond repayments

Both the above scenarios will reduce the repayment period by several years and save a substantial amount in total payments.

After all, who really wants to pay any more than they absolutely have to?

Remember, by having a bond, however much it might hurt on the day that debit order leaves your account, is still better than those forced to rent.

When you pay rent, you essentially pay off someone else’s bond, enriching your landlord.

By contrast, owning a home means you’re investing in your own future and building your own wealth and should be a top financial priority for those who can afford it.

In addition, come retirement, surely having no bond to worry about each month is better than hoping to have saved enough to be able to pay rent for an undetermined period of time?

REMINDER

The prime lending rate in South Africa had remained constant at 11.75% for well over a year until the South African Reserve Bank’s (SARB) monetary policy committee (MPC) voted to cut the interest rate by 25 basis points at its most recent meeting in late September.

That saw the prime lending rate reduce to 11.50%.

That’s still high, don’t get me wrong.

Three years ago that figure stood at 7%.

Will we ever get back to those ‘glory days’? Perhaps no time soon, but there are certainly indications that further reductions are on the horizon, starting with the MPC’s final meeting of the year in November.

Remember, the MPC meets every two months (six times a year).

What did a 25 basis point cut mean in monetary terms?

By way of an example (see graph below), prior to the most recent rate cut, 20-year repayments at prime (then 11.75%) on the average house bond in South Africa of R1 458 924 would’ve cost R15 810 per month to finance.

Following the SARB’s decision to cut that prime lending rate to 11.50%, that now means a monthly bond repayment of R15 558.

That represents a monthly saving of R252. Although it doesn’t sound like a lot, every cent counts.

Over the course of 20 years (240 months), that equates to a saving of R60 480 – on the assumption there are no further rate changes during that period.

But here’s the scary part …

To finance a R1 458 924 bond over 20 years at a prime lending rate of 11.75% does NOT cost R1 458 924. In fact, it will cost a staggering R3 794 511.

Do the sums yourself:

R15 810 x 240 months = R3 794 400 (give or take a few rands).

DO THE MATHS

Now, the part where you ‘save’ by changing nothing …

You were granted a bond at the time of the higher interest rate (11.75%) because the bank you approached for a home loan asked you to complete and sign a million forms and were satisfied you’d be able to afford the monthly repayments over 20 years (for example) and not default on doing so.

Now that the required repayments have come down, you should, in theory, still be able to afford that initial monthly payment.

And that’s exactly what you should do. Keep paying the amount that you did on Day 1.

You are essentially paying ‘more than you need to’.

No bank will ever tell you to do that, because it will mean they’re losing out on money over the 20-year repayment period.

But how much will you save?

Experts are optimistic that interest rates could drop to 10% at some point in 2025 (still well above that dreamy 7% from 2021).

If you continue to pay that R15 810 per month (as above), you would be overpaying by R1 731 each month as a 10% prime lending rate would ‘only’ require you to pay R14 079 per month.

The total repayment on an average bond of R1 458 924 over 20 years at 10% prime with no deposit would amount to a total payment of R3 378 944.

However, were you to continue paying as if the prime rate was 11.75%, you’d pay that total sum off in 213.7 months.

That’s 26.3 months quicker than the full 20 years (240 months), saving you a total of R415 567 in payments.

In summary: Change nothing and save!

Monthly bond repayment table

The South African website’s table below compares the now old monthly bond repayments on various bond values over a 20-year period assuming no deposit and repayments at prime, to the new cost after the most recent 25 basis point cut and the monthly saving that entails:

Bond	Old (11.75%)	New (11.50%)	Saving
R750 000	R8 128	R7 998	R130
R800 000	R8 670	R8 531	R139
R850 000	R9 212	R9 065	R147
R900 000	R9 753	R9 598	R155
R950 000	R10 295	R10 131	R164
R1 000 000	R10 837	R10 664	R173
R1 458 924	R15 810	R15 558	R252
R1 500 000	R16 256	R15 996	R260
R2 000 000	R21 674	R21 329	R345
R2 500 000	R27 093	R26 661	R432
R3 000 000	R32 511	R31 993	R518
R3 500 000	R37 930	R37 325	R605
R4 000 000	R43 348	R42 657	R691
R4 500 000	R48 767	R47 989	R778
R5 000 000	R54 185	R53 321	R864

SARB MPC MEETING DATES FOR 2024

The MPC meets every second month.

The SARB’s final meeting of the year will take place on Thursday, 21 November, where, according to experts, another cut is potentially on the cards.

Month	Date
January	25 January – No rate change
March	27 March – No rate change
May	30 May – No rate change
July	18 July – No rate change
September	19 September – 25 basis point cut
November	21 November