The Quiet Arithmetic of Sowing

Small extra payments into a home loan do far more work than their size suggests, because of the way interest on a bond is calculated. That is the arithmetic behind sowing a little every month.

Interest on a typical South African bond is worked out daily on the balance still owing and charged monthly. So any extra amount paid in reduces the balance straight away, and every month after that the interest is calculated on a smaller number. The saving includes all the interest that extra money would have attracted over the remaining life of the loan, and that effect compounds in the owner's favour in the same way it otherwise compounds in the bank's.

Basically, the payment that feels pointless on its own becomes significant once it is repeated. A homeowner who adds a modest amount on top of the instalment every month, without fail, can often shorten the term of the bond noticeably and pay a good deal less interest overall. The statement shows it slowly, a balance a little lower than expected, then lower again.

The catch is consistency. One generous payment after a bonus helps, but the small amount that leaves the account every month, including the months when it feels unnecessary, is what moves the end date. Many bonds also let that extra money be drawn back later, so it is not always locked away, though the terms differ from bank to bank.