House Loan vs Long Term Saving

[alexbavib]

@niteshayde While keeping money in an access bond is a good way of mitigating interest, it’s not equivalent to a 10% investment because you’re starting at minus whatever your bond rate is.

Having no bond means no interest and putting that money towards an investment is growth.

If it weren’t for capital growth of the underlying asset, you’d be losing money on the bond, just losing less by keeling your savings in the access bond.

 

[niteshayde]

@alexbavib Yes, of course, but isn't that a technical argument? The question isn't really about investing, but about buying a house.

If I have a bond, I am always going to pay interest. But if I put my 100 000 into my access bond at 10 pct, I will be loosing less net than investing it at 5 pct and paying only the minimum on my bond.

Besides, I will have access to the money if I need it.

Or am I missing your point?

 

[alexbavib]

@niteshayde The question is whether buying a house using a bond or saving up first is better.

Not using a bond is better as long as the growth you can achieve from savings outpaces the growth of the capital price of the property.

The interest rate of the bond has little to do with that apart from counting against the capital growth of the property.

An access bond allows you to mitigate that with flexible savings, which OP might not HAVE if he takes a bond

 

[niteshayde]

@alexbavib You'd also need to take rental costs in the savings period into account.

But my point was simply to alert OP to an access bond as an option.

With OPs budget they'd be able to move into their own property faster and pay back the loan much faster than stipulated and thus save a lot of interest mitigating the downsides of taking out a mortgage.

If the only factor is as an investment, it is likely better to save up first, but then the question is whether buying a house actually is a good investment.

 

[alexbavib]

@niteshayde Yea, I agree with all points.

Home ownership has a bunch of other perks separate from being an investment on some level.

 

[tomorrowsworld]

@unbelievable Past performance cannot be used as the sole basis for future performance. Account for a probable range of outcomes through proper analysis and exclude your girlfriends savings, you might break up down the line and she might want her money back and a percentage of the interest gained over the period she would be investing in.

 

[bobbydaca]

@unbelievable You're not doing a like for like comparison. - 18k vs 25k. Then, I assume your expenses include the rental (potentially your partner is also contributing) on where you are currently staying? If so, build that into your calculation. ie 25k+rent less rates and levies (on a property) per month into a bond escalating at 5% will pay your 1.75m house in how long vs 25k savings escalating at 5% will build to over the same timeframe. Then do like for like calculation

You're based in Jhb in what is a buyers market. What the future holds for the market is uncertain so you have to take a position on that - if the Jhb council doesn't get things sorted out this could have negative impacts and if they do, we may see a reverse of the exodus to Cape Town. Then consider where your qualification and career might take you. Do you need to be mobile or not? Do you want to be Jhb based, or even SA based?

Also, if you're going into this with a partner make sure you clearly define each parties responsibilities, share and what happens if one or the other defaults.

 

[unbelievable]

@bobbydaca Super thanks for this perspective. You right it is a buyers market, it’s been a buyers market since Covid. Looking at projections it’s expected to stay that way for at least a while.

My plan is to stay in my current position for the next 4-5 years by which time I’ll have my PhD and my focus will be to be close to universities (A keen interest on Wits/UJ/UNISA) which is perfect for the area I want to live in and where I’ve been tracking poverty stats. My partner and I have been together for 4 years so not to jinx things but I little doubt of his willing to push through this.

 

[bobbydaca]

@unbelievable If the stats you have indicate a high likelihood of the market continuing to decline then wait it out and save.

Interesting if you do a full like for like, assuming you rent the same property you are going to buy, with rental yields of 8.5% added to your savings as it's a cost savings per month, 5% escalation in payments (both bond and rent), 11.75% bond rate and 3% return on savings, your property is paid off after 57 months and if you saved, your savings would be 96% of initial cost. In summary there's not much in it between saving and buying now.

wrt my comment regarding your partner, simply consider anything can happen and put in place the right agreement to protect you both.

Good luck with your choice.

 

[carlv_52]

@unbelievable Biggest consideration when buying property should be how long the home will likely be able to serve your needs. If you are not confident of staying there for at least 10 years you should not be looking to buy. Your calculations show you how much freedom your savings rate is able to buy you, so only trade that freedom for a fixed asset once you are confident it's the right move.

 

[unbelievable]

@carlv_52 Love this!!! Fully agree! The plan is a simple 3 bedroom house. I don’t expect our family to expand to the need of anything bigger ever or definitely not for the next 10 years.

 

[pergamum]

@unbelievable I think you also need to weigh up the benefits of your accruing interest on the bulk amount of your savings and the amount of interest that you may have to pay for a bond. Additional concerns I would have in this situation include:

• Restoration / renovation costs that may be required. Yes, you've bought the house at 2m but you may not like the bathroom and want to renovate which may cost another R100k
• Fee's that will be due for transfer / SARS / Agents etc.
• A flexibond can be a very good tool to assist homeowners.
• If you and your partner are looking at getting married and purchasing the house individually / separately, please be sure to have a look at your pre-nup / options at marriage (community of property or not, accrual, what you bring in, you get out etc. ). It would suck to pay R2m on a house only to end up in a divorce and lose 1/2 of the value to your partner. (this is hypothetical, it's just a consideration for your future)

I also have to question why you would pay all your physical security (entire savings) on a property - because you don't mention having any other savings / retirement income / provident fund etc. What happens if you purchase the house with your entire savings and then a divorce happens, then you need to purchase another dwelling and only have half the capital. What happens in an emergency when you no longer have that money to fall back on? You or your partner or your parents are in an accident and don't have medical aid or the funds to go to hospital.

While it is a great idea to purchase the house cash, I think that you also need to consider putting some of your savings into a provident / retirement fund as this would have the most accrued interest for your future retirement (yes, you are young now, but everyone on these forums will tell you to start your retirement savings when you are young). And if you are already putting money into one of these platforms, double it or triple it!

 

[unbelievable]

@pergamum This gave me a lot to think about. Thank you! If you had to recommend out of the 20k savings how much should I put away for house and how much for an RA?

 

[pergamum]

@unbelievable That's really up to you and your preferences. Keep in mind a RA / Provident fund should not be drawn upon prior to retirement.

I would look at doing a mixture of the following (in no specific order):

1. Tax Free savings account - save R30k per year tax free,
2. Easy Equities - invest in some stocks / shares/ crypto through EE.
3. RA/ Provident fund
4. Fixed deposit for a specified time period
5. Savings account (for a rainy day) preferably a money market or high interest savings account so that money is accessible.

That way you have funds that are building interest towards your future retirement (RA/ Provident), funds that you have invested for growth (EE), funds that are tax free and earning interest, funds that are inaccessible to prevent you spending (fixed deposit), and funds that are accessible should there be an emergency.

 

[soikeobongda24h]

@unbelievable Well some of the reasons some one may take a loan is

1 they can't gather that amount of excess funds over there rent or in totality like you can.

2 Instead of renting house for the 5 years while you save they could use that rental toward there own bond Or want stability.

3 property price increases .
So if you going for a good area hopefully properties will escalate in value over time .
Example my grand father bought his first house 40 -45 years ago for 14 000 we sold it recently for 2 million for just house after sub dividing .
So over time price for place will escalate in good areas but bond payment will be for purchase price.

4 gearing or leverage (property investments)
Use bank money to finance
Rent and generate a growing income that helps pay of property costs, in 5-9years you cash flow positive in 20 years have asset that generates income and paid of that escalates in value .
If had capital for 1 property could finance 3-4 when take rental income into account.

1. Buy when buyer's market or bottom prices like when interest rates are high . As they drop will become more affordable and can accelerate paying back and pay over fewer years .
   My first house I had with access bond put every extra cent in bond was settled by 8 years .
   You only get charged interest on outstanding Ballance so if you can pay off faster you pay less interest.
2. Tax
   When you have large amounts like 1 million earning interest you will be taxed on any interest over R23 800(interest exclusion) at your marginal tax rate . Meaning if you get 10% interest minus 40% (marginal tax rate estimate ) will only grow at 6% per year or inline with inflation .
   But debt interest is not taxed . Can even be a before tax expense with rental properties.
3. Impatience
   You want to have house now not in 5-7 years time .

 

[unbelievable]

@soikeobongda24h Amazing list. Gave me a ton to consider. Thank you so much!

 

[soikeobongda24h]

@unbelievable Also lots of people don't have the discipline to save that much .

Many people as soon as they have a big amount available they increase there lifestyle and things they want.

Know a few people that survive fine and save in a RA where they can't touch but give them 100k they have access to and is gone in no time . Holiday/new car / hobbies/ drinking etc

One of biggest reasons 80% of house holds live month to month is our desire to live best life possible often takes us beyond our means . Why credit cards and personal debt so lucrative to banks .