Paying your home off in five years

Mpho asks: Why are people not paying off their bonds in five years when they pay off car debt in five years?

My real issue is about the finance system because people are not given an option of paying off the car debt (which might be more expensive than the bond) over 20 or 30 years, as happens with a bond. My argument is that if the finance system was giving people a shorter-term option, people could actually pay off their bonds within a shorter period.

Maya replies: The good news is that there is nothing stopping you from paying off your mortgage over five years if you choose, and the savings would be phenomenal.

In theory, someone who buys a car for R400 000 and pays it off over five years could just as easily buy a property for R400 000 and pay it off over the same period.

The reality is that most people who can afford a R400 000 car tend to live bigger lifestyles and want bigger homes. But if you can afford to repay R8 400 a month you could pay off your R400 000 home in five years.

This would be very cost-effective as you would only pay about R100 000 in interest over the period. If you paid the same home off over 20 years, your monthly repayment would be about R3 725 but it would cost you nearly R500 000 in interest over the period. As you clearly point out, it is the banks that score when you pay off over a longer period.

In terms of repaying a car over 20 years, this would not make any financial sense as a car depreciates in value so you would effectively pay more than double the price for a car that by the end of 20 years is only worth the price of scrap metal. Also, after five years the banks would not get much money from your car if they had to repossess it due to non-payment, while your house would actually have increased in value.

How you can pay off your home loan faster
Jan Kleynhans, head of FNB Home Loans, explains how you can pay off your home loan faster:

There is a difference between the contractual period of the home loan and the repayment period. We always register a 20-year home loan as most people usually require that period in order to afford the repayments, thus we cater for the vast majority when it comes to the contractual obligations.

However, consumers are not restricted to repayment over that period. They are free to pay in excess of their contractual repayment and could in reality settle the home loan in whatever period they choose, provided it is paid off before the 20-year period.

Consumers are not prejudiced by paying off sooner and can even have a home loan closed if paid off beforehand. It is really more a practical issue to standardise at 20 years. However, if a customer insists on their repayments being calculated over a shorter term (as in this example five years) and wishes to change their agreement, then the bank would need to reassess the “Loan Term Reduction” using the normal credit and affordability criteria to ensure they can afford to pay off the mortgage over the shorter period.

It is important to know, however, that if you are settling a home loan in full, for example you are selling your home, you do need to give a three-month notice period.

There is a pro-rata three-month interest settlement/cancellation fee for home loans that still have an outstanding balance and where the home loan is settled within three-month notice period or part thereof.

In accordance with the bank’s loan agreement, a customer intending to cancel their mortgage is required to give a 90-day notice of their intention to do so. In cancellation matters where notice has not been received the bank includes three months’ interest in the settlement figures. This settlement interest will, however, be charged pro-rata — that is, if the cancellation process takes the full three months no additional interest is charged.

If the mortgage is cancelled within the three-month period, the settlement fee is then re-calculated over the remaining days to the end of the three-month notice period. Clearly this is not applicable where notice has been given and served.

It is important to note that this fee is only applicable where the loan is cancelled. If a loan is paid up early, irrespective of what period, and the customer chooses to retain the facility, there is no early settlement fee and the customer will only be liable for the ongoing administrative fee applicable to all open accounts as well as their annual homeowners’ insurance/life insurance premiums where these are financed through the home loan account.

Read more news, blogs, tips and Q&As in our Smart Money section. Post questions on the site for independent and researched information.

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Maya Fisher French
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