Does paying extra into your bond reduce the interest by much?

Your monthly bond repayment is not necessarily the only amount you can pay towards your home loan. Paying more than the required instalment could reduce both the outstanding balance and the interest charged over time.

You look at your bond balance, then at an extra R200 or R500, and the amount can seem almost laughable next to hundreds of thousands of rand you still owe.

However, the maths becomes more interesting when that extra money reaches the capital balance early. Nedbank explains that payments above the required instalment reduce the capital balance faster, which can shorten the loan term and reduce total interest. Your original loan amount also affects the calculation, which makes the deposit you paid when buying the home part of the wider picture.

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What can a small extra payment do?

Absa provides a concrete example based on a R1 million home loan over 20 years at a 10.5% variable rate. An extra R200 each month reduces the estimated repayment period by one year and three months and reduces estimated interest by about R104,503 under the bank’s assumptions.

R200 is hardly the kind of amount that makes you stare at your banking app in disbelief. Repeated over a long bond term, Absa’s example shows why dismissing it as insignificant can be a mistake.

An extra bond payment can look small on the day you make it. Its value becomes easier to see when you look at the interest that capital could have attracted over the years ahead.

Your own bond will give you a different answer

Your outstanding balance, interest rate, time left on the bond and extra payment affect the result. According to Standard Bank, extra monthly payments or lump sums can reduce interest and help settle a home loan sooner. A variable rate can also change during the loan period, which puts the interest rate attached to your bond into the same calculation.

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Before every spare rand goes into the bond

If a higher bond payment leaves no cash for an urgent repair, medical shortfall or income gap, you could end up borrowing again to cover the expense. Check whether you have an emergency savings buffer before committing every spare rand to the bond.

Paying extra into your bond is not about finding a heroic amount. A few hundred rand paid towards the capital now can reduce the interest charged over the years ahead.

Paid into the capital early, it can reduce how much interest you pay before the final instalment arrives. The value comes from what those extra payments can take off the eventual cost of your home loan.