Your bond the best place for your savings at the moment
South Africans are always being urged to save more, but with interest rates at the current low levels, there are not many attractive savings options.
However, says Rudi Botha, CEO of leading mortgage originator Betterbond, homeowners are lucky in that they always have the option of saving by using any spare cash to reduce the capital portion of their home loan and achieving really worthwhile payoffs for doing so
By reducing the capital portion of your home loan, you will also reduce the interest you must pay every month and the overall repayment period in other words, you will invoke the power of compound interest in your favour, he says.
For example, on a R1m bond if you pay R200 extra a month it will cut 13 months off the 20-year repayment period and save you R79 000 worth of interest not a bad return on the R45 400 you will have invested.
If you can manage to pay an additional R400 a month, the savings will amount to around R147 000, as opposed to the R86 400 you will have invested, and you can speed things up even more and increase your returns - by making lump-sum additional payments into your bond account whenever you get extra money such as an annual or performance bonus, an inheritance or a gift. Some people even use their earnings from a part-time job to pay their bond off faster and save more interest.
What is more, Botha notes, the returns you make on money invested into your home loan are entirely tax free, and the current standard home loan interest rate of 9% is a lot better than what is being offered on most savings accounts. (According to www.bankmonitor.co.za, the best interest rate offering currently is 7,7% on a five-year fixed deposit account.)
And while some other types of investments may offer a better return, they also usually involve taking a far higher risk which is not what most people want to do with their savings and an increased tax liability.
He says it is important also to note that when homeowners pay their bonds off faster they are simultaneously increasing their own equity in their properties, which will put them in a better position when they decide to sell and should be accessible in an emergency so that they dont need to apply for personal loans or overdrafts.
Of course, paying your bond off faster will also help you do what we are all always being urged to do make better financial plans for retirement. A paid-off home is one of the best preparations you can make because it will enable you to live rent or bond-free in an asset that is increasing in value at a time when inflation is likely to be eroding the value and buying power of whatever income you have.
Article from: www.betterbond.co.za