So there was a recent opinion piece on moneyweb: How To Pay Your House Off In 7 Years.

A pretty broad claim was made:

- Pay 10% extra each month;
- Pay a constant percentage of your take-home salary; and
- Make your payment on the 25th (when you get paid) rather than the 1st – because this could take a year and a half off your mortgage period*.

*I am raising a HUGELY sceptical eyebrow at this one.

Do this, and you could pay off your house in 7 years.

This tip comes from this website: justonelap.com, where you find some disclaimers to said opinion:

- It may mean that you need to buy a smaller home.
- Increase your monthly repayments by 10% each year (rather than just by your salary increase), in addition to the 10% extra each month.
- Keep your savings in your home loan in order to reduce interest (presumably, whatever savings are left, after all the extras).

Allow me to illustrate some compounding:

- In year one, let’s say that your mortgage is R12,500 per month.
- So instead, you pay R13,750 (up by that initial 10%).
- By year 2, you’re up to R15,125
- Year 3, R16,638…
- And so on until year 7, where you’re up to R24,360. Nearly double what you had to pay initially.

So on the one hand – each additional Rand you put in is a contribution to capital, so you automatically save interest. On the other hand, are there better ways to use the money?

Anyway, here’s some modelling.

**What does increasing the mortgage repayment by 10% each month and/or by 10% per year do to the loan period?**

Here’s the way a mortgage works:

- Each month, you pay back a portion of the initial capital.
- The interest is calculated on the capital that’s left over.
- Over time, with a fixed repayment, you’re paying progressively more capital, and progressively less interest.

So if you can accelerate the capital repayments, you do two things:

- Pay things back quicker in general (because you’re paying more, obviously); but also
- You make your fixed repayments more efficient (because less of the payment will be allocated to interest).

A graph of a 20 year mortgage at 9% on a R2 million property with a 10% deposit:

So here’s what happens when you pay an extra 10% per month:

Bottom line: you cut 4 years off your mortgage repayment period.

Here’s what happens when you escalate your mortgage repayments by 10% a year (that is: you attempt to keep your mortgage repayments as a fairly constant proportion of your salary – sort of):

Bottom line: you cut your mortgage period in half.

Here’s what happens if you do both (an extra 10% per month, and an annual escalation of 10%):

Bottom line: the extra 10% per month takes off an extra year, if you were already escalating at 10% per annum.

Here’s what happens when you pay on the 25th:

You save a month. Unless I’m missing something dramatic.

The justification:

- I pay my first instalment a week early. So I save a week’s worth of interest, which goes toward capital.
- But then my second instalment is no longer a week early. It’s exactly a month later. In which case, I pay a full month’s interest on the full capital amount.
- The only saving is on my very first payment. Which, over 240 months of repayments, gives me a month off.
- Again, unless I’ve missed something.
- If someone has an alternative viewpoint, please point it out. I’d love to say “So listen, making your mortgage payment a week earlier means that you save a year and a half – for doing almost nothing!”
- But as it stands, I just don’t think that’s true.

So let’s just ignore that last, and assume that you pay an extra 10% per month, and you do an annual escalation of 10%. It means that you’ll have paid off your bond, in full, by year 9.

**An Alternative**

Because I love alternatives.

Instead of paying the money into your bond, let’s put the extras (the 10% per month and the 10% escalation) into a Satrix equivalent. Assuming a 15% annual return, here’s the growth path of your investment (alongside the capital portion outstanding of the standard mortgage):

Assuming that higher return, you could take the Satrix investment and use it to pay off the outstanding capital somewhere in the beginning of year 8.

But if I’m honest – I wouldn’t trade in a mortgage saving for a satrix return. The mortgage rate is almost a guaranteed return. In other words, once you’ve committed to buying a house, every rand of extra capital repaid “earns” a return equal to the mortgage interest rate. And you’ve already committed to the repayment process, so there’s less to be gained from going elsewhere.

So if you’ve already bought a house, pour money into the mortgage. But ignore the advice around the 25th. That’s what I’m saying.

For more in this series of home-ownership:

- Rent or Buy: The Problem with Home-Owning
- Rent or Buy: How To Be A Property Mogul
- Rent or Buy: Why You Should Just Buy A House

*Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.*

## Comments

## Kosta July 24, 2014 at 10:37

Brilliant.

Reply## Anonymous July 24, 2014 at 11:06

I love it when you talk Satrix..

Reply## Jayson July 24, 2014 at 11:14

I, um, do it all the time…

*dirty grin*

Reply## Kosta July 24, 2014 at 11:24

Also worth considering are the Tax savings. This will be obvious to you, but for the benefit of your less financially-literate readers, if you invest in Satrix, you pay Capital Gains Tax when you cash out. Whereas if you “invest” in your mortgage, it is tax-free (so to speak). Perhaps you’d like to add your insightful two-cents into this point as well, Jayson?

Reply## Jayson July 24, 2014 at 11:39

That – that is an excellent point.

*struggles to find a counter-argument*

*fails*

*redoes the calculation*

When you take the CGT into account, you only save 3 months (using that same 15% return story). So even more proof that the mortgage-investing is really the best way to do things…

Thanks Kosta!

Reply## Rich July 24, 2014 at 15:09

J – one word… NACM (or 4 if you want to be pedantic). Thus, it’s NOT actually a saving of only 1 week. Important to consider the compounding date…

Reply## Jayson July 24, 2014 at 16:46

Rich, enlighten me.

In my calculations, if you bring the payment date forward by 5 days, but keep the same notional repayment, then there is 5 days worth of interest in month 1 that gets allocated to capital. So your month-end capital amount at that date is:

Initial Capital – (Monthly Payment – 25 days interest)

instead of:

Initial Capital – (Monthly Payment – 30 days interest)

But when you roll forward to month 2, and pay on the 25th, then you’re going to pay:

Month 1 Capital – (Monthly Payment – 30 days interest)

…because you’re paying a month later. If your policy was to pay on the 30th, then you would also pay:

Month 1 Capital – (Monthly Payment – 30 days interest)

So the only “saving” in this scenario is that initial 5 days of capital, which will reduce your eventual repayment period by ±one month (because there is the compounding impact of the interest being calculated on the capital outstanding at the beginning of the payment period – which is lower in the 25th scenario by 5 days worth of interest on the initial capital).

What am I missing?

Reply## Anonymous July 30, 2014 at 08:47

Hi Jason

Nice articles

Reply## Jayson July 30, 2014 at 09:06

Thanks! 🙂

Reply