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Wednesday Jan 02, 2013

'Investing' in your property's bond would be the best new year's resolution.

Although New Year's resolutions are notoriously difficult to keep, there is one that can really deliver enough financial benefits to keep homeowners motivated for a whole year.

And that, says Rudi Botha, CEO of leading mortgage originator BetterBond, is the promise to yourself to "invest" something in your bond every month.

"At this time of year, many people are making plans to get better control of their finances and to save money for their children's university education or their own retirement," he says, "but the truth is that if you're a homeowner and you have some surplus cash each month, the very best 'investment' you can make is in your existing bond.

"The reason for this is that the amount of interest you will save on your home loan will, in the long term, far outweigh the returns you could hope to make by choosing seemingly more exciting or adventurous investment avenues."

With the average home price now being about R900 000 and the average deposit being 18%, the average monthly bond repayment on a 20-year loan granted at the prime interest rate of 8,5% is just over R6400 a month.

However, thanks to the way compound interest works, the homebuyer who pays only the minimum amount each month will pay some R800 000 in interest over the course of the loan - or almost as much as the original cost of the property.

But by contrast, says Botha, the homeowner who pays just 10% more than the minimum each month - or an additional R640 in the example above - will pay off the loan in 16 years instead of 20, and save some R185 000 worth of interest in the process.

"That represents a whopping 50% return on the additional R123 000 invested in the home loan, which is significantly more than you could hope to earn by investing that money in the stock market, for example, or in a moneymarket account.

"In fact there simply isn't any other investment that can guarantee you this type of return over 20 years. What is more, anything that might come close is bound to be very high-risk, while property is relatively risk-free, showing steady growth in the long-term. The latest First National Bank statistics reveal, for example, that real (after inflation) house prices have grown 58% since July 2000, despite the recession experienced in 2008/ 09."

In addition, Botha notes, building equity in your home by investing extra capital into bond will give you a strong financial foundation on which to base your plans for meeting your family's future needs.

BetterBond Press Release

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