Whose home is it anyway? …yours,
you decide how you want to pay it off!
Have you ever heard the expressions ‘Home, sweet home’ and ‘Home is where the heart is’? If you are a home owner, you can relate to these sayings.
You are probably also already an expert at making the house a home: Looking after maintenance, security, attending to the garden…
The more difficult questions are the following: What does your mortgage or bond look like? Do you know if you have a 20-year or a 30-year bond, do you know what interest rate you are paying, how much you owe? If you don’t know the answers to these questions, you probably also don’t know by when you will be calling the house your home, something you will not be able to do until you have paid off your mortgage or bond.
Do you have to wait for 20 or 30 years to become a home owner in the true sense of the word? Not necessarily…
To pay off your mortgage or bond or not to pay it off – that is the next question, and then following on this, by when or how soon and another important question that is related to this – what is the impact and what all should you consider? As with other matters financial, this is not a decision to be taken lightly and one that you should discuss with your personal financial advisor/planner, together with other financial issues such as providing for a comfortable retirement, medical insurance, critical illness and life insurance, setting up an emergency fund as well as car and household insurance.
There are various factors that come into play that are unique to a bond or mortgage and that you have to consider when thinking about paying off your bond or mortgage and in particular in considering WHEN to pay it off.
What follows is a brief overview of some of the aspects that you should consider when thinking about paying off your mortgage or bond, also if you are of the opinion that paying it off sooner rather than later is the best way to go.
It is important that you view these as guidelines to help you make an informed decision about your home, one of the most important purchases you will make in your life. These are some of the financial aspects that you should consider as they will have a financial impact. There are also emotional considerations that are not only subjective but also very individual, as it depends among other things on your stage of life and your attitude towards and feelings about debt in general.
Whatever you decide about your mortgage or bond is your own, personal decision. Having said this, it is important that you ‘arm’ yourself with as much information as possible before making a final decision. Make the time to discuss your thoughts about your bond or mortgage with your qualified personal financial advisor or planner that looks after your financial portfolio.
If you don’t have a qualified financial advisor/planner yet and you don’t know one, speak to your bank, as they might be able to point you in the right direction. As time is the most critical factor when it comes to investing for optimal growth, you are never too young to acquire good financial habits. A suitably qualified financial advisor or planner is an important link in this chain.
Now, let’s consider some of the financial aspects – those that have a financial impact – of paying off a mortgage or a bond.
Interest rates, re-financing and shortening your bond’s lifespan
Usually, the interest rate charged on mortgages or bonds is lower than that charged on, for instance, credit card debt. Your bond or mortgage can be financed according to a fixed interest rate (it will remain the same and your payment will remain the same) or an adjustable interest rate (it will be adjusted upwards or downwards as interest rates either rise or fall and your payment will be adjusted accordingly).
All things being equal, the first few years’ of payments to your mortgage or bond will go towards the interest. Depending on the size of your bond, if you increase your monthly payment and/or deposit a lump sum, you will pay off the interest earlier, start paying off on the capital amount owed earlier and in so doing pay off your bond earlier. A positive spin-off of decreasing interest accrued on your bond or mortgage is that it does not attract personal income tax. The same is not true when investing money in a savings account, as interest accrued on your savings is taxable.
When it comes to interest rates, not all financial institutions are equal. Before you decide on taking out a home loan or bond at any financial institution, shop around to see which institution offers you the best interest rate. You might get the best and lowest interest rate at the bank where all your other accounts are held, but another bank or financial institution might be interested in acquiring your business and offer you a more favourable interest rate. Shopping around will be worth your while, but just make sure that you compare “apples” with “apples”.
Another aspect related to interest rates that you should bear in mind, especially if you are considering paying off your bond earlier, is other debt that you might have. If you have “funds to spare” and you have significant other debt that is more expensive (attracting a higher interest rate) than your bond, such as credit card debt or car finance, pay these off first before putting those extra funds in your bond or mortgage.
When considering interest rates in the context of considering paying off your bond earlier, ask your bank about re-financing your bond at a lower interest rate. You can consider this when the interest rates have changed significantly since you first took out your bond (especially if it’s decreased and your mortgage or bond is still attracting the higher interest rate) and you opted for a fixed interest rate.
If you are not content with paying off on a mortgage or bond for the next 20 to 30 years and you want to be done sooner, then you can approach your bank to change the lifespan of your bond or mortgage to the period that you would be comfortable with (i.e 10 years or even 5 years). Just a word of caution, don’t overcommit yourself when reducing the lifespan of your bond – the interest rates are not that exorbitant and you have to sustain yourself and/or your family financially in the meantime.
Your financial portfolio
While your house is your primary residence and not one that you would necessarily consider selling, it is a financial investment and, as such, forms part of your personal financial portfolio, living alongside other financial investments such as retirement planning, income protection, life and dread disease insurance and similar products.
Your financial portfolio and what it consists of is an important consideration if you are thinking of paying off your bond, especially if you are thinking of paying it off earlier. The reason for this is not only to ensure that you have sufficiently provided for other possible scenarios in your life, but also to achieve a diversified financial portfolio. This is one where you have some money invested in property (your mortgage or bond when paid off), possibly some money in shares (not necessary) and then your investment in medical and life insurance, an emergency fund, income protection, provisions for a comfortable retirement and car and household insurance.
“First things first” is an important principle and one that comes to mind. If your financial portfolio has shortcomings or is not in place yet, attend to that first, as it doesn’t make sense paying off your bond or mortgage if, for instance, you are not sufficiently covered in terms of your life and critical illness insurance and you have not adequately provided for a comfortable retirement.
Maturity of your bond
How many years have you been paying on your bond, but more importantly, how many years do you have left to pay? If you only have a short period of time left and you have sufficient additional funds available, you might want to use those funds to pay off the bond. In all instances when considering paying off your mortgage or bond earlier, take care to find out if no penalties apply when doing so. Should penalties apply for whatever reason, it might be wise to hold off on paying the bond or mortgage off early and wait until it’s reached full maturity. This too is a personal decision and one that you should make bearing in mind the factors discussed and highlighted above.
Your stage of life
This is closely linked to the maturity of your bond or mortgage. However, it also touches on the emotional issues alluded to earlier, because if you are close to retirement your attitude towards debt in general is different to the attitude of someone with quite a few years to go before retirement.
If you are close to retirement, your appetite for risk has decreased (you no longer want to take unnecessary risks) and not having a bond or mortgage debt would give you peace of mind, knowing that the house is now finally your home. However, also at this life stage, before deciding to pay off your bond, it is important that you first reduce debt in all other areas of your life and ensure you have provided adequately for the other risks already discussed. If you are confident that you are financially secure, then paying off your bond before you retire makes sound financial sense.
A word of caution is in order for those who are not only chronologically speaking young but also young at heart, but who have a mortgage or bond as well as an appetite for risk. The first word of caution is about borrowing against your bond (once you’ve paid off on it and have some capital available). While there is general consensus that a bond is the cheapest, most flexible loan, there is the temptation to borrow more than the property or home is worth (its value). While banks are unlikely to allow this, a general rule of thumb of mortgage debt is: Keep it under 30% of your net worth and under 80% of your home’s value.
The second word of caution relates to depositing a pension or provident fund lump sum, received when changing employers before you have reached retirement age, into your bond or mortgage. While your house is appreciating in value and you will get a return on your investment, there are other investment opportunities that are likely to provide a much better return, especially if you are still young and have the benefit of time. The first option would be to (if possible) deposit it into the new employer’s pension or provident fund, but there are other options available that you should explore with a qualified financial advisor or planner.
You are likely to pay personal income tax (at an interest rate significantly higher than you would be gaining in terms of return on investing the amount in your bond or mortgage) on taking your pension as a lump sum before retirement. The amount of tax you would be liable for depends on the amount you take out as a lump sum, the fund rules as well as the rules governing pension and provident funds in your country.
As you can see, there is no right or wrong decision when it comes to paying off your bond or mortgage. As it’s your home, you make the payment choices to best suit your personal circumstances. However, as with all financial matters, you must do your research and obtain as much information as you can before making a decision. Take the information and discuss it with a qualified financial advisor or planner, who can further advise you on the best way to make and enjoy your purchase of a lifetime:
Your home, sweet home!