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It is very exciting to purchase your first home and it is a great investment but you need to understand that buying property involves a long term financial commitment and you need to be financially able to afford the monthly instalments. While you have the pleasure of knowing that one day you will own your home, you need to deal with the EMI’s that can sometimes be a nightmare.
What is EMI?
EMI stands for Equated Monthly Instalment, it is what you pay each month towards repayment of your loan. The loan EMI depends on the loan amount, the interest rate and the loan term.
Pay off your mortgage as soon as possible:
The best way to save money on your home loan is to pay it off as fast as you possibly can. The longer you take to settle your mortgage the more interest you pay and the higher the overall cost of the loan will be.
- Shorten your payment terms for example from 20 to 15 years. Yes your monthly instalments will be higher but you will pay off your loan in much less time and thus save the money you would have spend on interest over the longer payment terms. This must only be considered if you can afford the higher instalments, there is no point in trying to pay off your mortgage sooner if it is going to get you into debt.
- Lump sum payments. Pay any additional money you have available such as a Christmas bonus into your home loan. It lowers the amount and thus lowering the interest.
- Pay your mortgage bi-weekly. The majority of home loans are set up so that you make one payment a month meaning you would make a total of twelve payments an year. Bi-weekly payments means that you make a payment every second week. There is 52 weeks in a year meaning you will make 26 payments in total every year opposed to 12 payments a year or 24 if you make two payments a month. This might seem like a minor change but it can make a big difference over time and it can take years off of your mortgage. For example if your monthly payment is R1000 you will pay R12 000 an year towards your loan. If you made bi-weekly payments and paid R500 every second week you would pay R13 000 an year towards your loan. That extra R1 000 will help you to pay off your mortgage faster and will reduce your interest.
The way you make repayments is important:
Normally people focus more on the interest rate of their loan when trying to save money and reduce the time of their loan. But it is the way in which you make your repayments that has the biggest effect on your loan. A lower interest rate does make a difference but it is important to remember that interest rates will move up and down over the loan term.
- Make sure that your interest is calculated daily. You want each repayment you make to have an immediate reducing effect on your next interest repayment.
- If you can and your loan allows increased regular repayments and lump sum repayments do so as often as possible.
- Push your saving into your mortgage instead of making use of a separate savings account. Many home loans have the feature of a redraw facility which gives you the flexibility of being able to access the extra repayments when needed.
- Align your repayments with your income cycle. By doing this you will never be late with your repayments and you will be able to maximise the amount paid towards your home loan.
The kind of interest rate you choose is imported:
The kind of interest you choose is very important and can either get you into debt in the future or extend your payment term. There is two main options a fixed rate loan or a floating rate loan, also known as an adjustable rate. Fixed interest rates remain the same when the interest rate goes up and unfortunately the same when the interest rate drops below your set interest rate. A floating interest rate goes up and down as the interest rate fluctuates. Both have their advantages but it is important to make sure that you will be able to make your monthly repayments each month which ever kind of interest rate you choose.
Pay your first instalment as soon as you settle:
A month after settlement of your loan is when your first monthly home loan repayment is due. By making this payment on your loan at settlement, you can reduce your interest repayments and put yourself ahead of your payment cycle, which will save you money.
Don’t lower your repayments if your minimum repayment drops due to lower interest rates:
The interest rate goes up and sometimes comes down making our monthly minimum home loan repayment lower. But try to take advantage of the lowered interest rate and maintain the old higher level of repayment. You will save money by doing so and also pay your loan off sooner. With this strategy you are making regular extra repayments for you are paying more than the minimum required amount each month. The great thing about this is that you hardly notice that you are paying more towards your loan for you are already use to paying this amount.
Make use of internet banking:
Internet banking is a low maintenance and low cost way to manage your home loan. It is also a convenient way to have instant access to your home loan details. You can stay up to date with your interest rate, make changes where needed, make transfers and down load your loan transaction history to see how far you are ahead of your payments.
The more you pay off your mortgage the more you own:
You build up equity the more you pay off your home loan and the more you own the property. You can borrow against this equity for other investments such as a second property.
Get the right home loan:
It is important that you get the right home loan so that you can take advantage of the above mentioned tips. With the tips mentioned you can save a great deal of money over the loan term. So do your home work and find the right loan for you.
Lastly:
- Be sure that you have a good credit record before attempting to take out a home loan.
- Save up and try to put down a deposit of at least 15 percent of the property price. This will lower your interest rate and make your loan application more attractive.
- Ask your creditor for the option of making more than your allocated payments, each extra bit you can push into your home loan will lower your interest rate and loan term.
- Do your research before making a decision, do not expect a person from the bank to educate you.
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Debt Blog 