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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
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