House Loan vs Long Term Saving

[unbelievable]

Hi everyone,

So I’m relatively young (22m) however been working since 15 and I’m in a pretty high position job, Medical practice manager. I do this and 3 other side jobs while studying (Final year BA, working towards PhD).

Because my expenses are relatively low, R14 00 - R17 000 per month, I am able to save a lot. On a good month I can put away R25 000 but on almost all months I can put away R20 000. My partner is also studying but is recently starting a job and is willing to contribute R5000 into savings.

I’m looking at buying a house before 30. My credit is is pretty good (640/720) and I have R120 000 credit available to me through CC or loans. I don’t think I’d struggle to get a mortgage.

However I am wondering why I would take a loan. It takes 20 years @ R18 000 to pay off a R1.75 million house. If I put R25 000 away every month for 5 years with an increase of 5% p.a, I’m looking at getting R2.1 million (R1.6 million in todays money).

So why pay off a house loan over 20 years when I can own a house in 5 years with savings? Am I missing something?

 

[kcame30]

@unbelievable If you take out a home loan for 20 years, there is no penalty to pay it off in 5.

Most people can't however afford to save all the money to buy a house upfront, so they are forced to take out a home loan.

Also, how would the housing market be in 5 years time? Would it be unaffordable to just save for 5 years then? Would you need to save for another 5 years to afford the house you could have taken a loan for?

Are you currently renting? If so, consider it that you are funding someone's life style, that money could be better spend on your own mortgage.

There are a lot of things to consider, but if you want to buy a home, there is not much downsides to taking out a loan (providing that you can pay for it! try not to make it more than 40% nett salary), providing a large lump sum upfront, and trying to pay it off in 5 years.

 

[unbelievable]

@kcame30 My question is then. Will I still be charged interest for the entire period. I’ve taken two loans before, both small each about R20 000 to pay back over 12 months. I paid them back before the 7 month mark each time yet money was deduced from my account each month for the remainder of the period for the interest that was due. If I take a loan out now and I happen to finish at 5 years will I still be paying interest for 15 years?

 

[pergamum]

@unbelievable For your smaller loans, did you request settlement figures and close the loan that way? As I understand it, your settlement figure will include an amount for the lender as a recovery for the interest that they have lost given that the time-frame is reduced. If you go for a settlement figure, and pay off this amount, the lender closes the account and you are not charged the monthly figure.

A lender is not going to lend you money if they are getting nothing in return, therefore, if you are paying in a period less than the stipulated time, they are influenced negatively by 1. no longer having your payment coming through, and 2. no longer having the same amount of interest due to them from their bulk investment.

 

[unbelievable]

@pergamum No I don’t close it that way I just paid the remaining balance. However from your answer I’m assuming yes I will be charged that interest for 20 years. Early or not.

 

[kcame30]

@unbelievable Im 90% certain you are not charged for the remaining interest if you pay it off in 5 years.

 

[bleeper123]

@unbelievable You are not charged for the remainder of the period. What the others are stating is, ensure you get a settlement letter from the bank (when you make your final payment) and a confirmation letter that the account is closed. The same had to be done for the personal loans, then you would not have been charged interest for the additonal months after paying it off. Banks seem to catch a lot of people out with this. Because they think just paying the last amount is all they need to do. But if the bank has an agreement for 12 months and you don't actually close the account, then yes they will keep charging that interest amount every month for the 12 months... because that is the agreement. The same is necessary when someone is selling the house before the term is over, or you want to pay the remaining balance on your car before the term is over. In fact, any account you close, request a settlement and/or confirmation of account closure letter. Because if that banker did their admin without 0 f's to give, which happens often, they may not have actually closed it. But with the letter you can go back and have them pay you the funds back wrongfully taken.

 

[bleeper123]

Additionally, for home loans specifically, banks want a 3 month notice. Otherwise they will charge you up to 3 months interest to close the account early. So if by e.g. January 2030 you know you are only a few months away from paying off the last bit, you raise a notice of settlement (some banks you can do it in app) and then you can either pay immediately + 3 months interest or just pay the rest over the 3 months. Will work out pretty much the same either or. But if there was 10 years left after that, you won't still be charged interest for 10 years after that

 

[donald_allan]

@unbelievable No, you are only charged interest for the duration of the loan. Same goes for a vehicle. If you want to settle the asset early then you can get a settlement quote which won’t charge “future interest”

 

[kittypl]

@unbelievable

Will I still be charged interest for the entire period.

No. When you set up the loan you can typically select what happens in when you pay a sum above the minimum monthly repayment: either they

1. keep the repayment debit order the same and shorten the duration of the loan, or
2. reduce the debit order amount, but keep the duration the same.

I used option 2 and am about to pay off my property more than a decade before the 30 year loan period completes. You have to warn them 3 months in advance of settling the debt, otherwise there is some penalty to pay.

 

[airel]

@unbelievable You don't get charged interest for the entire period. Once the balance is paid off, it's over. Read up on amortization if you're interested ( ). Will also explain why extra payments, early, will save you much more in interest than you might expect

Some banks might charge a fee if you close a loan early though, but afaik all of them will waive it as long as you give them 3 months notice (ie, inform them I'm going to close my loan on this day, at least 90 days from now).

 

[prettythings]

@unbelievable No. The interest is on outstanding amount

 

[telldtruth]

@unbelievable I am no an expert but this is how I understand it

You pay the interest on a loan first and then the Principal debt. This way the lender still makes money off of you. It is to your advantage to pay as much as you can as quickly as you can as every day the interest is calculated. If your total payments are nearing the total on the Principal debt and outstanding interest before the 20 year term you can request to either settle the loan or request the monthly term stays the same but the payment value is adjusted. You might want to do this to keep the loan open so that you can draw from it.

Also is it normal that the contract with the lender will stipulate a penalty if the loan is settled in less then 1 year. This is less then the 5 years you mentioned but it is worth noting and looking out for in your agreement

 

[unbelievable]

@telldtruth Thank you for this!

 

[alexbavib]

@unbelievable The only thing I have to add is that buying a home locks in the capital cost.

Every one of my properties’ values dwarfs what’s left on the loan after 10-15 years.

That R2.1m house might be R3m in 5 years.

Otherwise saving is always a smart thing to do.

 

[kcame30]

@alexbavib I know there are certain home loans where you can also take out money that is paid into the bond, so if you are in need of some cash, you can just take it out of your loan.

 

[unbelievable]

@alexbavib This is true. However I accounted for real time cash amounts. Hence I said it’ll be R2.1 million then but will be equivalent to R1.6 million in todays money. The housing market in the area I’m looking at has been steady or if anything on a slow decline so I expect it to stay in line to the yearly increase expected to the real value.

 

[niteshayde]

@unbelievable I have an access bond. This means I "store" most of my savings in the bond account instead of a savings account. Thus I save on interest, but still have access to the cash, should I need it.

Due to the interest rate on my bond, this is a guaranteed return of about 10 pct./year for everything I save.

You can possibly beat that by investing cleverly, but if you are only getting 5 pct. on your savings, this could be something to look into.

 

[unbelievable]

@niteshayde Savings I’m looking at 7-8% p.a so 10% sounds amazing. Thanks for this.

 

[noeljack]

@unbelievable Also factor in that the 10% is tax free savings where as the 7%-8% is taxable income (after the tax free threshold).