Question:
I have a home loan of approximately R250 000 and a money market account of R50 000.

Should I pay the money market amount into the bond in order to save on interest? What are the advantages and disadvantages?

Answer:
At first glance your question may seem to be a simple mathematical comparison with a conclusive result, but there are other considerations. For the benefit of the question allow me to answer it for you and then challenge a few dimensions regarding what else could be out there.

Firstly, let us evaluate your current scenario. For the sake of the example, let’s assume the R250 000 you speak of is the total liability on which your repayments are based. If your negotiated rate is the prime overdraft rate (currently 15 percent) it would amount to about R3300 per month on a 20-year bond. On the other hand, your money market account is probably yielding somewhere in the region of nine percent per year. Interest earned or accrued is regarded as gross income for the purposes of income tax with an annual exemption of R19 000 (under 65) and R27 500 (over 65) being applied. Your interest falls well within these exemptions and therefore tax will not have any bearing on the decision at hand.

So, for the 'simple' answer, it is easy to see that your bond will yield a greater return for your money. You would then need to decide on whether to allocate the R50 000 as an access type facility or restructure your bond to take the lump sum into account.

If you decide on an access type facility it means that the money would be available (usually within 24 hours after giving notice) and your repayments would remain the same. This would then result in your bond term reducing by about nine years, cutting the term almost in half! Question is, does this make it a sound investment or does it merely highlight the ravaging effect of interest on debt?

If you opt to restructure your bond it would need to be re-registered at the deeds office in the same manner and cost as a new bond. This should only be a consideration if you are looking to free up some cash flow by reducing the repayments or using the saving to invest in shares or a unit trust with a mix of asset classes.

Now let us take a step back. With that said, it is important to note that instead of testing two investments against each other to see where your money will perform better you should rather test it against inflation. Inflation beating returns lie at the heart of sound investment principles. To not keep up with and beat inflation means that you are losing the purchasing power of your money and hence yielding 'negative' returns. So how do your two assets perform relative to inflation? According to the latest Asset Performance Survey done by Credit Suisse Standard Securities, both cash and mortgages have managed to beat inflation on a pre-tax basis as is your case. The key difference is the level of out performance. Mortgages have beaten inflation on average by about eight percent compared to cash which had outperformed inflation by only three to four percent.

So, where we may have proved that money in your bond could well be a better vehicle for your money relative to cash does it mean it is the best place for you to be 'invested'?

If you had to then include the likes of equities (shares) into such a comparison then the level of out performance relative to inflation becomes an interesting observation as equities have outperformed inflation by between 12 and 25 percent. There is little doubt that over the long term equities will yield superior performance to that of their less volatile peers. But while solid returns are very inviting they cannot be traded for sleepless nights. Therefore, the right mix of assets would need to be established for you by taking your lifestyle needs and goals as well as risk appetite into account. A Certified Financial Planner can help you to look closely at all your assets and liabilities, determine your goals for the future and, in collaboration with you, develop a meaningful plan.

In closing, should you still opt for the route of bond payment, there are also a few behavioural risks associated with putting money into your bond. Observe them closely and avoid them at all costs: do not access your money for home maintenance and/or improvement and in 11 years, when it is paid off, avoid 'upgrading' your home or spending the 'excess' money you now have on a monthly basis unnecessarily. Rather invest this money wisely and further enhance your wealth creation strategy. Best of luck!

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