Turn R10 000 into R50 000 by in­vest­ing your end-of-year bonus in your bond

Weekend Argus (Saturday Edition) - - PROPERTY -

THE FES­TIVE sea­son is fast ap­proach­ing, with all the fun – and ex­pense – that it en­tails.

There’s no doubt that Christ­mas is one of the worst sea­sons for bud­get­ing, and af­ter a year of in­ter­est rate in­creases and in­fla­tion, property own­ers may al­ready be feel­ing the pinch. In fact, for many, the thought of that end of year bonus or 13th cheque may feel like some­thing of a life­line – a lit­tle bit of ex­tra cash to help with the fes­tiv­i­ties. But is that really the best use of your hard-earned money?

“Think about what you spent your last Christ­mas bonus on,” says Tony Clarke, man­ag­ing di­rec­tor of the Rawson Property Group. “Can you even re­mem­ber? How about the one be­fore that? Or the one be­fore that? It’s so tempt­ing to use the ex­tra money for a lit­tle lux­ury here, or a bet­ter gift there – es­pe­cially when times are tough – but that mo­men­tary sat­is­fac­tion is fleet­ing, and it doesn’t ac­tu­ally make things any eas­ier in the long term, or im­prove your life in any per­ma­nent way.”

The ex­act op­po­site is true when you put that ex­tra money into your bond, how­ever, and Clarke says do­ing so can ac­tu­ally in­crease the value of your bonus ex­po­nen­tially.

“All mod­ern bond fa­cil­i­ties al­low for ad­di­tional pay­ments above and be­yond your monthly min­i­mum. Just a few hun­dred rand ex­tra ev­ery month can save you tens of thou­sands of rand in the long term, and your end of year bonus can have much the same ef­fect.”

To il­lus­trate his point, Clarke uses an ex­am­ple of a bond-holder with a home loan of R500 000 at 9.5 per­cent in­ter­est. The min­i­mum monthly re­pay­ments for the loan, based on a 20-year term, would be R4 660.66, which means that bond-holder prob­a­bly earns a salary of around R16 000 a month. As­sum­ing he is lucky enough to get a R10 000 end of year bonus, and de­cide to put that ad­di­tional money di­rectly into his bond, that R10 000 could re­duce the bond term by as much as a year and save up to R50 000 on the to­tal cost of fi­nanc­ing. That’s five times the value of the orig­i­nal lump sum.

“The ef­fects of lump sum de­posits in­crease the ear­lier they hap­pen in the bond term,” Clarke says, “so putting your bonus to work in the first year of your bond will be even more ef­fec­tive than us­ing it in your 10th year, for ex­am­ple. The best op­tion is, of course, to put any ex­tra money you have into your bond right away, through­out the year – the sav­ings really are dra­matic over the long term.”

Those re­luc­tant to relin- quish their “emer­gency fund” to ser­vice their bond will be com­forted by the fact that most mort­gages have a flexi or ac­cess fa­cil­ity. This al­lows bond-hold­ers to with­draw any eq­uity they’ve built up with min­i­mal fuss.

“If you have a flexi or ac­cess bond, you can es­sen­tially use it like a sav­ings ac­count,” says Clarke, “keep­ing any ad­di­tional funds you have there to re­duce the in­ter­est you pay on your loan, while still hav­ing ac­cess to that eq­uity in an emer­gency. That money will save you far more in your bond than it could ever earn you in a nor­mal in­vest­ment ac­count.”

Say­ing good­bye to that bonus might sting in the short term, but it is, with­out a doubt, the best way to get the most value from your money. Making R10 000 do R50 000 worth of work on your mort­gage seems like a pretty good start.

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