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JOHANNESBURG – Generally speaking, many South Africans sell their current home every seven years and upgrade to a new, often larger property. A recent article warned against this type of behaviour. While a number of commentators maintain that a primary home is not an asset, for those who have chosen to buy a home, there can be significant benefits to paying additional funds into the home loan. Just imagine moving to a new home after seven years and the previous one is fully paid! While buyers often stretch their bond to as much as they can afford, in truth they should really take a smaller bond (buy a smaller property) – one that they could easily afford, Simon Brown, founder of JustOneLap, says.
In an interview with SAfm Market Update with Moneyweb, Brown explains how homebuyers can reduce their repayment term to as little as seven years. The first step is to increase the monthly payment required by the bank by at least 10%, which will make a significant difference in time, he says. Thus, if the bank requires a monthly repayment of R5000, buyers should pay at least R5500. The second step is to increase this payment every year as your salary increases. “Even if it is just 6%, you are taking home 6% more than you were the year before.” Although you are already paying 10% extra, also increase the payment in line with your salary increases. “In other words if your bond repayment is 10% of your take home pay, keep it consistently at that 10%,” he says.
And finally, make sure that the debit order is paid on the same day as your salary. Brown says typically people pay their bonds on the first or the last day of the month. If they are however getting paid on the 25th day of the month, the payment should be moved five or six days earlier. While this does not have a significant impact in a single month, it can slice a year to a year-and-a-half off the repayment term, he says. Discipline This approach will require significant discipline for most consumers, but every additional payment into your bond can make a difference. Many commentators believe that it would be difficult to get double-digit returns from most asset classes in the next couple of years. Warren Ingram, director at Galileo Capital, says he would definitely advise investors to pay extra money they have available into their bond. Against the background of a rising interest rate cycle it is not impossible that the prime rate, which is currently 9.25%, might increase to 10% in the next two years.
There are very few, if any, investments that are guaranteed to provide investors with a return of 10% per annum, whereas, should investors decide to pay additional funds into their bond, they know exactly what the saving would be, he says. There has been some heated debate on Moneyweb this week on whether primary homes can be considered an asset. Ingram says he would argue that if someone plans to live in the same property for a period of eight years or longer, it would make sense to buy the property, because if a person stays in that property for a shorter period of time, the transaction costs related to buying and selling the property make it more worthwhile to rent.
However, after around eight years rental escalations would outweigh the benefits of renting and it would make more sense to buy. While increasing bond repayments can result in a significant interest rate saving, this is not the only benefit. Ingram says for employees one of the realities of life is that there is no guaranteed employment. Average salary earners are so over-indebted that if they don’t have an income for three months, they have to sell something to get by, he says. The benefit of paying extra money into a bond is that you get room to breathe and have some reserves and emergency money if you need it, he says.
This article was first published on MoneyWeb:
