Why you may not want to close your home

Weekend Argus (Saturday Edition) - - PROPERTY -

CON­SID­ER­ING that most home­own­ers have a loan that is cost­ing them up to 30 per­cent of their monthly in­come in re­pay­ments, it isn’t sur­pris­ing that the ma­jor­ity would re­ally like to get that loan paid off as quickly as pos­si­ble.

How­ever, says Shaun Rade­meyer, chief ex­ec­u­tive of mort­gage orig­i­na­tor Bet­terLife Home Loans, clos­ing your home loan ac­count com­pletely is not nec­es­sar­ily the best course of ac­tion for ev­ery­one.

“In fact, even if you have a very low bal­ance that you could eas­ily pay off, de­lib­er­ately keep­ing your home loan ac­count open could prove very use­ful if you ever need to bor­row money again – to fi­nance a child’s ed­u­ca­tion, for ex­am­ple, or to cover a fam­ily emer­gency or even in­vest in an­other prop­erty.

“Bor­row­ing against the eq­uity in your home by ex­tend­ing your ex­ist­ing mort­gage again will def- initely be the cheap­est op­tion in these cir­cum­stances and should also be rel­a­tively easy to do, com­pared to hav­ing to ap­ply for other forms of credit.”

He also says that the longer you stay in your home, the greater the risk of you be­com­ing “house rich and cash poor” – or ow­ing noth­ing on your bond but at the same time lack­ing suf­fi­cient funds to pay for the up­keep of the prop­erty, in­clud­ing rates and taxes, rou­tine main­te­nance and proper in­surance.

“How­ever, as the value of your home in­creases over time, so will the eq­uity that you can use to main­tain it – pro­vided that your home loan ac­count is still open.”

Rade­meyer has­tens to add, though, that this does not mean that home­own­ers who are us­ing a large chunk of their dis­cre­tionary in­come ev­ery month to re­duce the cap­i­tal por­tion of their home loan as quickly as pos­si­ble should stop do­ing so.

“They should know that when you put ex­tra money to­wards pay­ing off your home loan, what you are ac­tu­ally do­ing is elim­i­nat­ing a non-tax de­ductible ex­pense, and that this is es­sen­tially the same as mak­ing a tax-free in­vest­ment.”

At the mo­ment, he says, the real rate of re­turn on pay­ing off your bond is around 4.3 per­cent a year, af­ter in­fla­tion at 6.2 per­cent is sub­tracted from the cur­rent home loan in­ter­est rate of 10.5 per­cent and there are of course many who will point out that they can do bet­ter than this by in­vest­ing their ex­tra cash else­where.

“But be­fore they do, they need to con­sider that other in­vest­ments like shares are gen­er­ally much more risky than real es­tate, and that div­i­dends are taxed.”

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