Should you kill a bond or not?

YOUR BOND CAN BE A GREAT VEHICLE IN WHICH TO GROW WEALTH

If you get an investment return higher than the interest rate on your bond, you should allocate extra cash to investments.

People are generally motivated to pay off their bond on a primary residence as quickly as possible to be debt-free and free up cash flow.

I see the decision to pay off a bond over the term, or sooner, as an investment decision hinging on how best to use the available spend to create long-term wealth. A house is only a productive asset if you sell it one day and buy something for less; it’ll be an asset on your death for the house’s beneficiary. I’m not in a rush to pay off my bond. The property value should go up over time, so I pay off debt based on the original purchase price. The monthly payment, due to inflation, goes down every year. In 10 years, the real present value of a R10 000 per month payment at 6% inflation is R5 583.95. Given this, with an annual salary increase, the repayments should become more affordable each year and you may have spare cash.

Assume you can afford to make your monthly bond payment plus an additional 20%. Let’s test if you should invest the additional 20% into your bond or allocate it to investments, using these parameters:

R3 million bond with instalments payable at current prime rate (10.25%), over the term. 20-year repayment is R29 449 pm. R29 449 plus 20% is R5 890. Start at 30, then retire and stop saving at 65 (35-year term). When you finish paying off the bond, you save what you were paying. If you pay off the bond over the term, you can save R5 890 per month for the first 20 years and then R35 339 (R29 449 plus R5 890) per month for the remaining 15 years. If you pay off the bond quicker by contributing an extra 20%, it’ll take 152 months to pay it off; you’ll then have 268 months (22.3 years) to save R35 339 per month.

If you can get an investment return higher than the interest rate on your bond you should allocate any additional cash you have to investments. Theoretically, you should get a long-term return of around inflation plus 5% for an equity-centric investment. By starting to save early, it becomes habitual and you can start seeing the benefit of any accumulating value earlier than if you wait until your bond is paid off.