Keeping your home loan options open

Private Property South Africa
Press

Why closing your home loan account completely is not necessarily the best course of action.

Only a small percentage of buyers can afford to pay cash for their homes, with the majority having to rely on home loans that can cost them up to 30% of their monthly income in repayments.

So it is not surprising that many people strive to pay off those loans and be “bond free” as quickly as possible, says Berry Everitt, CEO of the Chas Everitt International property group. “However, closing your home loan account completely is not necessarily the best course of action, for several reasons.

“Firstly, there is here is a strong likelihood that you will need to borrow money sometime in the next few years to finance an education, a car, or even another property, and using your access bond to “re-borrow” some of your home equity will definitely be the cheapest way to do this.

“The interest charged on home loans is much lower than that on student or personal loans, car finance and credit card balances, and this is actually reason enough to keep your home loan account open, even if there is only a nominal amount owing.”

Writing in the Property Signposts newsletter, he says another good reason is to avoid the situation in which you become “house rich and cash poor” – that is, when you owe nothing on your home anymore but lack sufficient funds for the upkeep of the property, including rates and taxes and insurance as well as routine maintenance.

The longer you stay in your home, the more the value will increase, and once again you can access some of that equity to maintain and improve it if you need to, provided your home loan account is still open.

Meanwhile, those who are still using a large chunk of their disposable income to pay off a home loan can rest assured that this is one of the safest investments they could be making, Everitt says. “Paying off your home loan or putting any additional cash into your home loan account is eliminating an expense that is not tax-deductible, which is the same as making a tax-free investment.

“At the moment, the real rate of return on such an investment is at least 5,75%, with the inflation rate currently running at around 4% and the prime rate being 9,75%, but it could be more if the interest rate on your home loan is higher. In addition to being tax-free, it is also a lot less risky – and stressful – than many other types of investments.”

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