People don’t need to be in finance jobs to make intelligent investment choices. They don’t need a degree in numbers to take proper care of their financial future. In order to take advantage of wise investments, one simply needs to think logically and be patient with long-term investments.
In spite of the rising cost of living, don’t cut back on putting away a little money each month for the long term – and if you don’t do this yet, then 2013 is definitely the year to start this handy practice. If you already put away a little money each month, the only adjustment you should think about making is putting that spare cash into your bond – over and above your mandatory monthly instalments. One way to save cash is compare prices on uPrice.co.za.
This additional money going into your bond will save you hundreds of thousands of rands on interest across a 20-year bond. It works as follows:
The average house price that’s bonded is about R900 000. If the home owner only pays the minimum required amount (after an 18% deposit), they’ll end up paying R800 000 in interest for the duration of the loan period. For longer period loans (eg: 30 years), they may end up paying up to three times for the home than the actual sale price. The compound interest on a home loan makes it difficult to avoid paying much higher for the home than the sale amount.
If a homeowner pays 10% more into their home loan every month, they’ll end up paying off the home loan four years quicker (ie: in 16 years) and save approximately R185 000 in interest. The approximately R123 000 additional investment in a R900 000 bond represents a 50% return on this investment – much higher than any investment you make in the money market or stock market. There’s no other investment vehicle with the type of return in a 20-year period, with as little risk as a home loan.
While it seems counter-productive to invest in the minimisation of your long-term bond interest, it beats having to pay the full interest amount for the duration of your home loan and still having to foot the bill for long-term expenses like your children’s university education or motor vehicles.
If you’re concerned about paying off interest, it may also be a worthwhile investment choice to rent out your property at a monthly amount that covers your monthly bond repayments as well as an additional payment to reduce the interest, while you rent a different property. It all depends on whether you see buying a home as an investment or simply as buying a home.