PAYING OFF YOUR PROPERTY


Investing & Money
piece written on the 21st July 2014 by  

Goodness me, over the past few weeks I’ve read more articles about property than I’ve ever done and it’s all because there seems to be a big hype around whether your house is an asset, whether it’s more of a liability than anything and whether the property market is a market that you actually want to be in. Editors across many credible websites have been arguing the points with each other and it’s been a really interesting debate.

Now, here’s the thing, not everyone is into active investments. Most people grow up being told that owning property is better than renting property and in most cases that is the right advise. If you get more technical and want to become an investor then it might not be the very best option, but for now I’m not going to get into that detail and rather just assume that the average person will want to buy rather than renting and for this reason we’ll assume that people will get bonds and they’ll be paying a mortgage on a monthly basis.

If you purchase a property for R1,000,000 you’ll probably be looking at a monthly mortgage of close to R9,000. The repayments have changed a couple times this year due to the interest rate hikes so I’m not 100% certain of the exact value but I know it’s close  so let’s go with that. You’ll also be paying that R9,000 per month for a period of 20 years which is quite standard. Some banks push for 25 or 30 years and you therefore have lower monthly rates, but to be honest you want to go for 20 years and not 30 years because those extra 10 years cost you an arm and a leg in interest.

So here’s where we stand, we have a R1,000,000 loan from the bank, we’re paying it back at R9,000 per month with a 9% interest rate. 9% is perhaps a little conservative, but it’s a number to work with at this point.

Let’s look at the maths quickly:

A R1,000,000 loan at an interest rate of 9% being paid off at roughly R9,000 per month means that after 20 years you’ll have paid R 1,159,342.29 in interest. Not to mention that R9,000 multiplied by 240 months is R2,160,000.

That’s a great deal of money for a property that cost just R1,000,000!

So here’s the thing, if you’re in a position where you can afford just a few hundred Rand more each month, you can seriously reduce the amount of interest you pay over the 20 year term. If you can afford just R250 extra each month this is the effect it’ll have:

  • You’ll save R97,179 in interest.
  • The loan will be paid off in 18.58 years in stead of 20 years.

Here’s a visual representation of the interest from scenario one and then scenario two with the additional R250 payment:

Property Interest Repayments

That’s no laughing matter at all!

When you apply for a bond, the banks these days are very sticky with their requirements and you usually end up getting a bond that’s a bit smaller than you could actually afford. This means that in a number of cases you will have some additional money available. Perhaps that amount is 5% of the loan amount when calculated into repayments. In other words, if your repayment is R9,000 and you have 5% extra that equates to an additional payment of R450. If we do the same exercise as we did above but with an additional payment of R450, the numbers look as follows:

  • You’ll save R 162 549
  • The loan will be paid off in 17.61 years instead of 20 years.

Once again, here’s a visual representation of the interest savings when you pay an additional R450 (5%) a month:

Bond interest repayment calculation

As you’ll see, just a bit extra each month makes an absolutely huge difference to your financial position in the long run. When I look at these scenarios I don’t allow myself to focus on the amount of money you save, but to also take into account how many years less you’ll be paying. If you’re 30 and you’re buying a place for R1,000,000 you’ll be 50 when it’s paid off, however if you’re able to pay that additional R450 per month you’ll be 47 when the house is paid off, thus unlocking a certain level of financial freedom before your half century.

There are many ways to skin a cat and when it comes to investing it really does boil down to the person in question. One might argue that it would be better to save the R450 every month for a deposit on an investment property which in several years will generate an income which could then be put towards the repayments on your primary house for example. That’s another way to look at things. Some might say that investing on the JSE would be better considering the average yearly return over the past several years is close to 17% or so instead of about 5% for property. Endless permutations, but for me the most important thing is to just start – being stagnant when it comes to your wealth is the number one way of preventing yourself from growing that wealth.

So, if you’re in a position where you could afford a little more each month, grab the phone, call the funding party and up your repayments. Note it down and then thank me later :)

Before I sign off for today I want to mention a few things:

  • Be careful before increasing your monthly payments, remember that there are things like insurance, levies, bank charges, maintenance and the likes which could choke you down the line if you don’t do calculations carefully.
  • I’m not a certified financial planner, these are just my thoughts based on some of the decisions I’ve made. I am not allowed to tell you what to do or how to do it, please keep that in mind.
  • Buying a property to live in is arguably not the best investment route, do your own research to see if it is for you.

Here are some interesting reads: