Dear readers
Thank you very much for your question.
Keeping in mind that a mortgage is usually the most debt you are likely to face in your lifetime, resolving your debt requires patience and diligence.
If a lump sum payment reduces the mortgage capital and the total interest paid over the period, the frequency with which such payments can be made may vary depending on the bond agreement and the financial institution's policies.
Most contracts typically allow the borrower to make additional payments to reduce the outstanding balance. However, specific terms may vary, so it is important to check your loan agreement or consult your lender/bond issuer for more information.
Read: Can I reduce my monthly bond premium in exchange for the repayment period?
Making an additional lump sum payment on a bond reduces the total interest you pay over the life of the loan, allowing you to keep more money in the long run, increasing your financial freedom and freeing up your funds for other investments or other investments. You have more flexibility in allocating your investments. Improve your lifestyle.
Adding a lump sum not only lowers your monthly payments, but it can also improve your creditworthiness by demonstrating financially responsible behavior and potentially lowering future borrowing costs.
Your goal is to reduce your monthly payments, not the term of the bond, so communicating this to your bank is important to ensure you reach your financial goals.
When you repay a loan in installments and are charged interest, each installment paid has two components: principal repayment and interest charged. At first, the principal repayment amount is small and the interest rate is high, and as you continue to make installment payments, the interest portion decreases and the principal repayment amount increases. Basically, the faster you pay, the less interest you'll pay in the long run.
Let's look at an example that shows the positive effects of incorporating a lump sum into a bond.
In this example, Katlego obtains bond approval for R3 million to be issued for 20 years, with an interest rate set at 11.75%.
In the first scenario, Katlego decides to stick to monthly bond payments only.
| First scenario: monthly repayments, no lump sum repayments | |
| original bond value | R3 million |
| rate | 11.75% |
| semester | 20 years |
| deposit | R0 |
| Total to pay | R7 802 690 |
| Principal amount | R3 million |
| Interest paid after 20 years | R4 802 690 |
| Loan balance after 20 years | R0 |
In the second scenario, Katlego makes a lump sum payment of R200,000 within the first year of the bond term and keeps both the term and interest rate the same throughout, i.e. reduces the repayment amount to create a full repayment period of 20 years. I chose to keep it.
| Second scenario: Monthly repayments and one-time repayment of R200,000. | |
| original bond value | R3 million |
| rate | 11.75% |
| semester | 20 years |
| Additional lump sum payment has been made | R200,000 |
| Total to pay | R7 482 511 |
| Principal amount | R3 million |
| Interest paid after 20 years | R4 482 511 |
| Loan balance after 20 years | R0 |
As shown in the figure, this lump-sum contribution has a positive impact on the total interest repayments. Taking the example above, in scenario 2, Katlego would save him R320,179 in interest by depositing her R200,000 in the first year of the bond term. This will save him 10.67% on the total interest paid over the 20-year repayment period.
In summary, paying off a mortgage is a significant financial commitment, and the potential benefits of a lump sum payment are significant. By carefully reviewing your loan agreement, understanding the terms and conditions, and communicating openly with your lender, you can tailor your approach to your unique financial goals.
Read: How can I pay off my mortgage faster?
Another important point to consider is whether there are access facilities available under the loan agreement. Access functionality can be a great financial planning tool for unexpected or unplanned expenses and strategic use of cash for other investment goals. If you have access, it's worth checking with your lender about the implications of making multiple lump sum payments on your bond. If you are unsure whether such access facilities are available, we strongly recommend that you contact your lender and, if not, inquire as to whether such facilities are available.
read:
Should I take the extra money out of my mortgage and invest it elsewhere?
Should I cash out my investment and put the money in a bond?
Would it be better to invest R500k or keep it in bonds?
