Port Elizabeth - People take great care to search for a special house in an attractive neighbourhood and spend more money to make it pretty, as well as hours of hard work in the sun to make the garden attractive.
We all accept that a house is one of the most important investments we can make.
One of the reasons that make a house such a good investment is that it is just about the only investment in which a normal average family can utilise financial leverage. Any bank is willing to give you a loan of about R500 000 if you can scrape together a deposit of R50 000.
Then you get the benefit of capital growth on the full value of the house over the next 20 years – using the bank’s money to grow your own capital. The alternative is to pay rent rather than interest and thus subsidise somebody else’s property.
On the other hand, your bank manager will be very sceptical of lending you R500 000 to buy some shares or unit trusts. He will likely argue that financial markets are too volatile and shares are unsuitable collateral.
And most bankers and financial advisers will warn against financial investment instruments that use leverage. (It is ironic that even the sellers of derivative products, such as financial futures and options, warn investors against them.)
The financial leverage in a mortgage bond is more than enough reason to purchase a house, rather than to rent. In addition, the bond account itself offers a good investment opportunity.'Earning' interest
Any additional amount above the minimum instalment which a home owner pays into his or her bond is a very good investment that yields a return far in excess of that offered by any other liquid investment. In simple terms, the yield is basically the interest payable on the bond.
The interest on bonds is currently in the region of 9% per annum and additional deposits in the bond account will thus “earn” 9% per year.
Most bonds offer the flexibility to access these additional funds without notice to the bank, any waiting period or asking anybody for permission. This high return is applicable on any additional payment, even only R20.
A savings account with the same flexibility will earn much less interest – maybe only 2.5% per annum on sums of a few thousand rand.
A bond account can make a very good vehicle to save for a specific purpose such as a holiday in Europe, a new car or saving to send the kids to university. And, very important, the yield on an investment in your own bond is tax free.
The saving in interest over a standard home loan of 20 years if the home owners pay a bit extra into their bond gives an idea of the investment value of your home loan. Saving thousands in interest
Fin24 asked Absa Homeloans to calculate how much people will save in interest by paying only a little bit more every month.
Total interest paid on a home loan of R1.2m at 9% per annum will come to R1.39m over 20 years. The instalment is R10 796 per month. If you pay R200 per month extra, you pay your bond off after 19 years and save more than R80 000 in interest.
If a home owner can pay R500 more than just his normal bond repayment every month, he will save R182 752 in interest over the term of the bond. His house will be paid after 17 years and 9 months. An investment of R500 per month in a savings account would have grown to less than half this amount.
Prospective buyers can save more interest if they put down a bigger deposit, says Absa Homeloans. “The deposit will reduce the debt amount, which will reduce total interest payable over 20 years. The bank will probably also give you a lower interest rate.”
Even using a home loan as an investment account for short-term savings will reduce the interest burden. For instance, pay a September bonus you want to use for your December holiday into your bond account and save interest for a few months.
Hopefully, the bond savings bug bites hard and you take less out of your bond than you originally planned to spend on your holiday.
Meanwhile, the value of your house is creeping up day after day as building costs increase and your garden matures.
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