Invest or make additional bond payments

[SauRoNZA]

Can anyone confirm this?

If this will be the case then yes, it makes more sense to invest abroad.

It is best to ignore the fearmongering types like him if you want to live anything based on facts.

It does make sense to invest abroad however...but you should ultimately only invest once you are debt free.

 

[Jopie Fourie]

It is best to ignore the fearmongering types like him if you want to live anything based on facts.

It does make sense to invest abroad however...but you should ultimately only invest once you are debt free.

Extremely bad advise, start investing as soon as you have additional money available. Waiting until you are debt free could take most your life and starting investing then will bring no results. Most of us normal people invest any or even all additional money so that we can grow proper investment portfolios over many years, while we are paying off debt.

 

[SauRoNZA]

Extremely bad advise, start investing as soon as you have additional money available. Waiting until you are debt free could take most your life and starting investing then will bring no results.

He is already investing by putting it in his home loan.

And the assumption is that he is already maxing out a pension fund or RA. I should have mentioned that.

This is standard form advice from most any financial advisement.

He can’t live off the measily 100k invest. He can life IN the paid off house and then put those instalments into additional investments.

Ultimately it’s all about balance.

Also the sooner you are debt free the sooner you start. It shouldn’t take all of your life at all.

 

[beefymoocow]

What does the bond repayment relate to? Is it for your personal house or are you renting out the property because you can claim back your tax. One of my bonds charges me prime minus 2 and my marginal tax rate is about 40%. So effectively my interest cost is around 4%.

 

[TStringList]

I am currently living in it but want to rent it out long term. Didn't know about the difference in tax but thanks for the heads up.

 

[me_]

I would pay off the debt as it's the only guaranteed return.

I would avoid international markets at the moment as everything is incredibly overpriced - do some reading on the everything bubble.

Warren Buffet's company is currently sitting on a massive pile of cash because he says he can't find anything of value.

Another illustration of how overpriced International markets currently are is the negative yields seen across bond markets where the price is so high, people are actually buying them at a net loss.

 

[Sideshow Bob]

But surely they cannot just start taking all our properties? I mean that will lead to an uprising. It sounds emotional, the way you describe it, rather than a forecast into the future. Yes, many people are deciding to leave but for others, there is still a thriving economy with many opportunities (in times of crisis).

Your property not taken yet? I am in talks with mods to trace your IP and then will take it up with property seizure unit.

 

[bchip]

What does the bond repayment relate to? Is it for your personal house or are you renting out the property because you can claim back your tax. One of my bonds charges me prime minus 2 and my marginal tax rate is about 40%. So effectively my interest cost is around 4%.

This calculation is not correct, most people get this wrong.
Effectively its really just 1 or 2% you deduct. (so 10%-1% = 9% interest you pay)
The government doesnt pay for half of your costs to be a homeowner.

Even though you might be in the 40% bracket your effective tax rate is different
as there are inclusions and exclusions that also have to be accounted for changing the effective rate.

 

[Jehosefat]

Even though you might be in the 40% bracket your effective tax rate is different
as there are inclusions and exclusions that also have to be accounted for changing the effective rate.

But effective tax rate is meaningless when evaluating an additional investment because any income it generates will be taxed at your marginal rate over and above the tax you are already paying. He is correct to use his marginal rate in the calcs. The only caveat to that being that the additional income might push you into a higher marginal bracket.

This calculation is not correct, most people get this wrong.
Effectively its really just 1 or 2% you deduct. (so 10%-1% = 9% interest you pay)
The government doesnt pay for half of your costs to be a homeowner.

Well it depends on what you are charging in rent as to what percentage you get back. E.g. if you are charging R10k per month in rent and your monthly interest cost is R8k then you are only liable for tax on the R2k difference so (at a marginal rate of 40%) you would only pay R800 per month in tax as opposed to R4000 if you could not offset the interest. If you have the same interest cost but are charging R20k in rent then you would pay R4800 in tax as opposed to R8000.

In effect, being able to offset the interest only mitigates the tax impact on the additional income that you earn, it has no impact on the tax you pay on all your other income.

 

[bchip]

But effective tax rate is meaningless when evaluating an additional investment because any income it generates will be taxed at your marginal rate over and above the tax you are already paying. He is correct to use his marginal rate in the calcs. The only caveat to that being that the additional income might push you into a higher marginal bracket.

If nothing else the 41% is only charged on the portion above a certain value, its a progressive scale.
E.g. you earn R1m in income its 207,448 + 41% of (1m-708,311)
The portions below it is taxed at lower levels (avg 28%).
So effectively it can never be just an easy calc of deduct 40%

I just dont agree with the idea that the government will pay 45% of your home loan.

 

[bchip]

Sorry guys wrong here, did the calcs

In this case a 41% does get a 41% saving on interest

 

[Polly101]

Returns on repaying your bond: 11% guaranteed

and tax free

 

[bchip]

I think the part (that I was thinking of) that people always get wrong is that they get a tax refund which makes
them believe they are deducting more than their bond.
But effectively a 10% bond / cost (only if rented out, so its an investment)
means that its a 6% loan instead of 10%. You still have a 6% annual cost.

So for a property to have growth means you have to have more than 6% in either net income or capital growth collectively in South Africa
(Europe and US is a different story)

 

[Jehosefat]

If nothing else the 41% is only charged on the portion above a certain value, its a progressive scale.
E.g. you earn R1m in income its 207,448 + 41% of (1m-708,311)
The portions below it is taxed at lower levels (avg 28%).
So effectively it can never be just an easy calc of deduct 40%

The bit you are missing is that it's marginal income and therefore, marginal tax. Assuming you are already paying tax on all your other income then the additional amount of tax you will pay on the additional income is exactly equal to your marginal tax rate as long as the additional income doesn't push you into a different tax bracket.

I just dont agree with the idea that the government will pay 45% of your home loan.

I don't disagree with you there. That is an idealised, best-case possibility that will only apply to the very first bond payment. By the time you are a few years into the bond and the interest portion is only half of the monthly payment then the tax rebate will only be 22.5% of the total monthly payment. Also the tax rebate is only, ever for the interest portion of the bond payments and not the principal/capital repayments.

I think the part (that I was thinking of) that people always get wrong is that they get a tax refund which makes
them believe they are deducting more than their bond.
But effectively a 10% bond / cost (only if rented out, so its an investment)
means that its a 6% loan instead of 10%. You still have a 6% annual cost.

So for a property to have growth means you have to have more than 6% in either net income or capital growth collectively in South Africa
(Europe and US is a different story)

Your annual costs will actually be higher because that does not factor in things like insurance, maintenance, and the actual capital repayment portion of the bond.

 

[Oldfut]

Interesting points. As I understand it, if you are still earning an income and don't need INCOME from the R100 000 it is either best to clear / reduce your debt then use any savings to invest but for capital growth rather than income.

As noted, if you have a rental property that is tax neutral, more or less (income = expenditure) but has gained in capital value, raise the bond (based on current value and until it is income neutral) and buy another property. And so it goes; but best left for clever fish. One day, when you want to retire, you sell (inject a lump sum) to eliminate your bonds and live off the property income. But this can be where the tax jaws snap shut unless you have been smart or had good advice. With duties and fees, buying and selling property is a lottery; and, as noted EWC awaits to destroy value.

I have had neither.

 

[8BitLife]

I would pay off the debt as it's the only guaranteed return.

I would avoid international markets at the moment as everything is incredibly overpriced - do some reading on the everything bubble.

Warren Buffet's company is currently sitting on a massive pile of cash because he says he can't find anything of value.

Another illustration of how overpriced International markets currently are is the negative yields seen across bond markets where the price is so high, people are actually buying them at a net loss.

This right here. International markets are at record highs. I work in the financial industry and we run an offshore fund. We are also sitting on cash because markets are looking very expensive. I am all for investing offshore and not because I have a negative view of SA. It's a case of diversification. As we always tell clients, SA Inc makes up less than 1% of the global markets. Why would you invest the majority of your wealth into such a small basket if you can afford to take it offshore?

But if you do intend to invest, hold off on buying for now. Wait for a correction (or worst case scenario: a crash) before you buy.

Apart from that, I am always a fan of getting rid of debt first. The faster you pay off your debt, the faster you will have more cash on hand to invest further. If you REALLY want to invest, at least use 50% of that cash to pay off debt and then invest the other 50%.

 

[JayM]

But if you do intend to invest, hold off on buying for now. Wait for a correction (or worst case scenario: a crash) before you buy.

I hear you, and I'm sitting on a large sum of cash as well, but devil's advocate: What happens if the correction/crash is only in 5-10 years time and you miss out on 100%+ growth in the meantime? Time in the market vs timing the market etc.

 

[8BitLife]

I hear you, and I'm sitting on a large sum of cash as well, but devil's advocate: What happens if the correction/crash is only in 5-10 years time and you miss out on 100%+ growth in the meantime? Time in the market vs timing the market etc.

It is about time in the market and not timing the market. And yes, the crash can come today or tomorrow or next month or next year or 10 years from now. Who knows? But 5% to 10% corrections are a lot more common. No market goes up in a straight line and that is exactly what the S&P 500 has been doing since beginning of October. It is due a pull-back which in all likelihood will not be more than 5%. But it will be coming in the next month or 2. just my opinion.

 

[cguy]

It is about time in the market and not timing the market. And yes, the crash can come today or tomorrow or next month or next year or 10 years from now. Who knows? But 5% to 10% corrections are a lot more common. No market goes up in a straight line and that is exactly what the S&P 500 has been doing since beginning of October. It is due a pull-back which in all likelihood will not be more than 5%. But it will be coming in the next month or 2. just my opinion.

If the belief among expert investors was that the markets would fall 5% from where it is, they would have already have pulled out and the market would have already fallen 5%, and the current outlook would be once again be risk appropriate (i.e., marginally better than risk-free rate ) gains. The market is mostly efficient - there really is no way to predict it unless you have some form of special knowledge or quantitative edge.

 

[8BitLife]

If the belief among expert investors was that the markets would fall 5% from where it is, they would have already have pulled out and the market would have already fallen 5%, and the current outlook would be once again be risk appropriate (i.e., marginally better than risk-free rate ) gains. The market is mostly efficient - there really is no way to predict it unless you have some form of special knowledge or quantitative edge.

By all means look at the attached chart of the S&P 500 since the bottom of 2009. I count more than 15 5%+ corrections over that 10 year period. So yeah, they are lot more common. Don't need a quantitative edge or special knowledge to know that nothing goes up in straight line and assets are in a continuous cycle of going from overvalued to undervalued. The market is efficient? I don't think so. Not a popular opinion to have but I just don't buy into it. If the market was efficient, things like Steinhoff and Enron would never have happened.