Making Your Property Work for You

We all need somewhere to live and buying a property is a significant, long term financial investment, leading many to speculate whether it really is best to buy, or rent. The answer depends on why you’re buying, and what you do with the property.

“Buying a home gives you a place to live (which is an immediate need) and, will hopefully appreciate in value over time. It’s true that buyers need to take a long term view in terms of their new home as most get between 20 to 30 year home loans. What they don’t realise though is that an extra payment of as little as R500 per month can quickly alter the playing field”, says Bruce Swain, MD of Leapfrog Property Group. 

Determine the length of your home loan

“If you’re buying a home to live in, as opposed to renting it out, my advice would be to get a 20 year home loan (if possible) and to pay it off as soon as possible. First pay off the credit cards and the car, then pump the rest of the money into the home loan; reason being that you’ll get rid of debt, while retaining access to your home loan – should you want to use it as a savings vehicle or need to draw on your bond to cover an emergency”, explains Swain.

Use your home loan to save

If a buyer purchases a property for R1.2 million, with a deposit of 20%, with a repayment at 11% over twenty years, it will cost the buyer R9,819 per month (excluding interest and municipal rate fluctuations). However, if the buyer increases their repayment by R500 per month the term reduces by 3 years, with a saving in interest of R251,484. Increasing the repayments by one thousand rand per month, reduces the term by 5 years, saving the buyer R409,140 in interest.

“Look at it another way; by depositing your savings into your bond you’ll be receiving the interest your bank charges on your home loan as positive interest on the monies you’re investing. If you have a mortgage of R2 million and pay in R100 000 you’re now only being charged interested on R1.9 million. The money you save in interest is now the positive interest you’re receiving on the invested funds – and can be withdrawn if needed”, explains Swain.  

Invest your savings

This saving could be put towards a child’s further education, invested or even used to obtain a mortgage for a second property. The savings on interest could also be put aside for alterations or perhaps adding a granny flat to the property for extra rental income. “Not only does paying your home loan off faster help you in the long run, it enables you to use your property as an asset years before you sell it”, believes Swain.