Buying a house is a key milestone in your life – a home loan is probably the largest financial commitment you’ll ever make. It’s also a long-term loan, which may take you as long as 20 years to pay off.

If you manage your home loan carefully, however, you can save money in the long run and give yourself more options when you next need credit. To understand how this works, you first need to understand how your loan payments are structured.

How home loan repayments work

The typical duration of a home loan is 20 years – because of the size of the loan, the longer payment term makes it more affordable. There might be as many as 4 components to your monthly payment, but 2 are standard on all home loans: your basic instalment and a service fee. Building insurance and Credit Life insurance premiums might also form part of your payment.

The largest component will be the basic instalment, and it’s here that can make the most difference to how much your loan ends up costing you. Each basic instalment consists of a capital portion and an interest portion. Interest on a home loan is calculated daily on the remaining capital balance. When you first start paying off your home loan, the capital owed is still very high, so the interest portion makes up a significant fraction of the basic instalment, compared to the amount subtracted from your capital balance.

The lower your capital balance becomes, the less interest you pay every month. Clearly, the faster you can reduce the capital amount owed, the less interest you will pay over the term of the loan. You’ll also pay off your home loan faster, which then allows you to put your former home loan instalments towards another investment.

Here are some tips on managing your home loan like a boss:

• Make every home loan payment on time to protect your credit score.

• There are many reasons never to miss a payment on a loan: for a start, it will make your home loan cost more in interest, because your capital balance hasn’t been reduced during that payment cycle. Missed payments also damage your credit score and remain on your credit record for up to 2 years – so they damage your ability to get credit in the future.

• The best way to make sure you never miss a loan payment is to set up a debit order to pay the amount due on the same date as your salary is paid into your account. You can also set up recurring payments via the Nedbank Money app or Online Banking.
  
  
  

Paying extra towards your bond makes financial sense

If you can afford to pay more than the minimum instalment on your home loan every month, you will save money in the long run and unlock the value of your home. You can turn it into an asset that helps you meet your long-term financial goals.

Whenever you pay more than the required amount, the extra payment does not go towards interest: instead, it reduces your capital balance faster. That in turn can reduce the term of the loan, saving you a lot of money in interest. You can use the Nedbank Home Loan Repayment Calculator to see the difference paying more than the minimum makes.

As an example, let’s assume you buy a house for R1.5 million, putting down a 10% deposit of R150,000 and taking out a home loan for R1.35 million over 20 years, at an interest rate of 8.5% per year. Your minimum monthly payment would be just over R11,500 – over 240 months, that adds up to a total of R2.76 million.

But if you can afford to pay just R1,600 more per month, making your instalment around R13,100, you’ll pay off the loan in 15 years and save around R400,000.

If you can afford R16,600 a month, you’ll pay off the loan in 10 years and save about R770,000.

Extra payments increase your equity faster

Equity is the difference between what your property is worth and the amount you still owe on it. Paying more into your home loan is a way to increase your equity faster, and you can borrow against that equity when you next need credit. If you decide to sell the home and you’ve been making extra payments regularly, the loan amount you still need to pay off will be lower, so you will be able to turn the increased equity into cash to put towards your next home.

Ways to pay more into your home loan

All this sounds simple in theory, but we understand that in the tough times we’re all going through, finding the extra money to put into your home loan can be difficult. You might need to make some sacrifices, but working out how much money you can save is excellent motivation.

Examine your current finances. When last did you revise your monthly household budget? You may find expenses you could trim, or decide to break bad habits that cost you money. A side-hustle could also help boost your income.

If you have an unused cottage on your property, you could renovate it and rent it out for extra income. When you get an annual salary increase, try sticking to the budget you had before, so you can add your entire raise to your home loan payment every month and not miss it. If interest rates fluctuate and your monthly payment is reduced, continue paying the former amount. Every little bit helps.

Even if you can’t manage it every month, paying extra into your home loan whenever possible will still save you some money. If you get an annual bonus at work or receive a tax rebate, putting it into your home loan results in a healthy reduction in your capital balance.

If your home loan has a revolving credit facility, consider transferring your emergency savings into your bond as a lump sum, while still making regular loan payments. You can always access these funds if you need them, but until then, they will reduce your capital balance owed and the interest you’ll be charged.

Get 1% cash back on a Nedbank home loan

Nedbank is committed to making home ownership a reality. Did you know that on average, Nedbank pays out around R1.8 million a month in cash back on home loans? In 2023, we paid out more than R20 million in cash back on home loans. For an affordable home loan tailored to your circumstances and value-added extras like up to R20,000 cash back and a 50% discount on your attorney bond registration fees, choose the bank that’s best for your money.