With the recent tax break, it is better to save on the home bonds, says FNB Namibia's head of home loans, Thomas Slabbert.
Slabbert says home-owners are lucky to [always] have the option of saving spare cash to reduce the capital portion of their home loans. As a result, they always achieve worthwhile payoffs for doing so.
He adds: “By reducing the capital portion of your home loan, you also reduce the interest you must pay every month and the overall repayment period. In other words, you invoke the power of compound interest in your favour.”
According to him, if a client, for example, pays an additional N$200 per month on a N$1m bond, it will cut 14 months off the 20-year repayment period and save the customer N$99 867.54 worth of interest – not a bad return on the N$45 200 that the customer will have ‘invested’.
An additional N$400 a month reduces 27 months off a 20-year payment, thus generating savings worth N$183 827.63, as opposed to the N$85 200 the customer will have invested.
Slabbert also says one can speed things up even more - and increase their returns - by making additional lump-sum payments into their bond accounts whenever they get extra money, from, say, annual or performance bonuses, inheritance or gifts.
"Some people even use their earnings from part-time jobs to pay off their bonds faster and save more interest. Further, the 'returns' one makes on money invested into their home loans is entirely tax free, considering that the current standard home loan base rate of 10.25% is a lot better than what is being offered on most savings accounts," he says.
While other types of investments may offer better returns, Slabbert is of the opinion they usually involve taking far higher risks – which is not what most people want to do with their savings – and thus increase their tax liability.
It is thus important to note; when home-owners pay off their bonds faster, they simultaneously increase their own equities in their properties, which puts them in a better position if and when they decide to sell. These should be accessible to them during emergencies so that they do not need to apply for personal loans or overdrafts, Slabbert advices.
Paying off a bond faster also helps people make better financial plans for retirement: “A paid-off home is one of the best preparations you can make because it will enable you to live rent or bond-free in an asset that is increasing in value at a time when inflation is likely to be eroding the value and buying power of whatever income you have.”
FNB Namibia proudly offers the FNB FlexiBond account, which gives transactional account holders the flexibility of accessing surplus funds from their home loans after completion. This means, customers can enjoy the benefit of easily accessing funds at their convenience and saving on service charges when engaging transfers from their home loans to their transactional accounts.