Buy One Property, Your Bank Gets One Free

Noticed how people tend to be lax when debt is taken out for purchasing property?

The comfort usually comes from the general expectation that the value of the property will rise over time, but taking too long to pay off your bond can cost you dearly.

What is a loan cost multiple?

A loan cost multiple is a metric that is used to assess the total cost of borrowing, compared to the loan amount taken. This multiple provides insight into how much an individual is paying in interest and fees relative to the total amount of money borrowed from the bank (the principal loan amount). You can calculate the loan cost multiple by dividing the total repayments by the initial loan amount.

If you take out a bond for R1 million at 11%, over 20 years, ignoring additional costs, your total repayment will be R2 477 252. The loan cost multiple is 2.48(R2 477 252/R1 000 000). You made more money for the bank, than the loan you took out. You bought 1 house, you bought your bank x1.48 the initial value of your property

Loan Cost Multiple

Taking 30 years to pay off your bond will score you a cost multiple of 3.43. You bought a property and the bank scored 2.43 properties! Inversely, if you paid off your bond in just 5 years, your cost multiple will be 1.3, netting your bank only x0.3 on the loan amount. 15 years seems to be the sweet spot where you can consider yourself to have kept things in check, scoring your bank x1.05 of the value of your loan.

The longer your finance period, the higher your loan cost multiple. The quicker you pay off your loan, the lower your loan multiple. This also applies to other types of debt. Credit card, overdrafts, personal loans, business loans....

With a home loan, the longer you take to pay off your bond, the more money you are paying to the bank and the more money you are actually pre-paying towards the growth of the value of your property

So try your best to PAY THAT LOAN OFF ASAP!! :)