Loading...
See More

Debt or deposit?

Sep 25 2012 14:05

Related Articles

Millions trapped in debt spiral

Drowning in debt

Debt review woes

R3bn stolen from employees – expert

Keeping rising RA costs at bay

Beating the debt trap

 

A Fin24 reader writes:

I have put in an offer for a house for R1.45m. I applied for a bond, and have R230 000 to spend on a deposit. I need advice on how to spend the R230 000.

I still owe R85 000 on a vehicle, with monthly repayments of R3 600 at 13%. I also owe R100 000 on a property with a bond of R230 000, with R1 500 per month repayments at prime.

To me it makes sense to knock off the vehicle, which is at the highest interest rate, and free up more disposable income, making the R1.4m bond more affordable.

The advice I'm receiving from the bank, however, is to put down the cash as a deposit on the house. I'm prepared to do whatever makes the bond acceptance more likely, but to me the bank's advice and common sense don't seem to be matching.

David Te Brake, a financial adviser at Pioneer Financial Planning, responds:

Your applied logic is excellent and you seem to be on the right track.

It's more common these days to see people take a higher interest rate in the form of a personal loan, simply to consolidate debt that has got out of hand. You, however, seem to have your ducks in a row.

Paying off shorter-term debt with a higher interest rate is always advisable since it allows you to save on the incremental differences between the interest rates of the different liabilities.

You mentioned a bond that you have on an additional property. Should this be rental property, it's always important remember the tax advantages of such investments. 

The interest paid on such property can be deducted against the income (rental) earned on the property. This will reduce the tax payable on rental received from the investment. 

Remember, this only applies to the first time the property is bonded. If the property is re-bonded or the bond is "accessed" and the funds used to finance something unrelated to the property, the interest on this refinanced capital will now not be deductible.

So in getting to the point of why the bank suggests you put down a deposit on the property: well, the answer is this simple - they want your money!

Credit legislation has made the raising of finance quite difficult for an investor. The bond originator or financer knows that your only option in getting this bond may come from the saving grace of a chunky deposit.

Remember the three Ts

Obtaining a bond these days is not as easy as it was even five years ago, and 100% bonds seem almost impossible to get your hands on.

Bottom line: if you want to buy the house, you will have to put down a deposit.

But you'll need to factor the opportunity cost of this decision into the purchase price of the house, particularly if this property will be your primary residence, which I like to refer to as "black hole lifestyle enhancements".

The residential property market is not giving the same capital (price) returns as it has over the past 15-20 years. Know the area you're buying in.

Remember the three Ts of your area when buying a lifestyle property: check out the trends, the traffic and the tsotsis.

Sometimes things aren't as clearcut as they should be, unfortunately. The reality is you may need to buy a cheaper home. Your logic and your gut feel may be at war.

You've clearly applied your logic to this, so then it may not be the worst thing in the world to trust that gut on this one.

- Fin24

Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers.

Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.

* Do you have a pressing financial question? Post it on our Money Clinic section and we will get an expert to answer your query.


*Follow Fin24 on Twitter, Facebook, Google+ and Pinterest.  
property  |  investing  |  debt
NEXT ON FIN24X

 
 
 

Read Fin24’s Comments Policy

24.com publishes all comments posted on articles provided that they adhere to our Comments Policy. Should you wish to report a comment for editorial review, please do so by clicking the 'Report Comment' button to the right of each comment.

Comment on this story
2 comments
Add your comment
Comment 0 characters remaining
 

Company Snapshot

sponsored content
Sanral arrogant and evasive - JPSA 2014-09-04 09:13

Lawyers representing Justice Project SA have labelled responses they received from Sanral's legal team relating to e-tolls as surprisingly arrogant and evasive.

We're talking about:

Small Business

Retailers of any shape and size can now unlock the power of mobile transacting.
 

Money Clinic

Money Clinic
Do you have a question about your finances? We'll get an expert opinion.
Click here...
Loading...