Offer to purchase question

[3WA]

What's seed it mean?

The correct spelling is “cede”. It means giving up your life policy to settle your bond first.

If your home loan contract requires you to have life insurance, the idea is that you find a good affordable policy on your own, and notify your home loan provider that you'll cede it to them (rather than taking the built-in, expensive policy that your home loan provider will offer).

 

[derp90]

Let's say for example you have a home loan, and your repayments are R20k pm, but you sink all extra funds into the home loan and average around R30k pm or more. If you sell the home after 6 years or so, will you have still benefitted from paying the extra per month?

I get that it would benefit you by reducing your interest over the whole home loan term, but I can't quite wrap my head around this situation.

I think the amortization part is confusing me, because it makes it seem like you're mostly paying interest in the first years anyway, so it would seem that even if you put in extra, you're still paying off interest instead of the actual home cost? :/

 

[Jehosefat]

Let's say for example you have a home loan, and your repayments are R20k pm, but you sink all extra funds into the home loan and average around R30k pm or more. If you sell the home after 6 years or so, will you have still benefitted from paying the extra per month?

I get that it would benefit you by reducing your interest over the whole home loan term, but I can't quite wrap my head around this situation.

I think the amortization part is confusing me, because it makes it seem like you're mostly paying interest in the first years anyway, so it would seem that even if you put in extra, you're still paying off interest instead of the actual home cost? :/

To expand on your example I've made the following assumptions:
Rate 7%, term 20 years, loan R2.6m, repayment R20158, actual payment R30k

If you just make the minimum payments, after 6 years your loan balance will be R2.163m and you sill have paid R1.006m in interest.
If you make the R30k payments, after 6 years the loan balance will be R1.3m and you will only have paid R837k in interest so your benefit is a saving of R169k in interest (which will show up as you having paid off R169k extra of your house).

Additionally, if you had an access bond you would be able to withdraw about R700k from the bond as well which is equivalent to the amount of additional payments you have made.

 

[derp90]

To expand on your example I've made the following assumptions:
Rate 7%, term 20 years, loan R2.6m, repayment R20158, actual payment R30k

If you just make the minimum payments, after 6 years your loan balance will be R2.163m and you sill have paid R1.006m in interest.
If you make the R30k payments, after 6 years the loan balance will be R1.3m and you will only have paid R837k in interest so your benefit is a saving of R169k in interest (which will show up as you having paid off R169k extra of your house).

Additionally, if you had an access bond you would be able to withdraw about R700k from the bond as well which is equivalent to the amount of additional payments you have made.

This is helpful, thank you. It seems there is no downside to putting as much as you can extra if you can afford to, except if you can make more with the money (at a higher interest rate than your bond) elsewhere.

 

[Snyper564]

This is helpful, thank you. It seems there is no downside to putting as much as you can extra if you can afford to, except if you can make more with the money (at a higher interest rate than your bond) elsewhere.

Dont forget this income is then taxed.

Any savings in your bond is not taxed.

 

[Jehosefat]

This is helpful, thank you. It seems there is no downside to putting as much as you can extra if you can afford to, except if you can make more with the money (at a higher interest rate than your bond) elsewhere.

Dont forget this income is then taxed.

Any savings in your bond is not taxed.

Yeah, tax makes the bond option very attractive. Although you can earn R23,800 interest a year before it starts getting taxed. For any other investments you'll be in for either income tax or CGT which would ramp up the return required to beat your bond massively.

Pretty much the only time it really makes sense not to put extra into a bond is when it's a rental property and you want to be able to offset the interest cost against the income for tax purposes (even then, it's not necessarily the best option to do this in all cases)

 

[derp90]

Yeah, tax makes the bond option very attractive. Although you can earn R23,800 interest a year before it starts getting taxed. For any other investments you'll be in for either income tax or CGT which would ramp up the return required to beat your bond massively.

Pretty much the only time it really makes sense not to put extra into a bond is when it's a rental property and you want to be able to offset the interest cost against the income for tax purposes (even then, it's not necessarily the best option to do this in all cases)

I'm guessing you should put the R36 000 in your TFSA first, then all the rest into your bond?

 

[Snyper564]

I'm guessing you should put the R36 000 in your TFSA first, then all the rest into your bond?

bond first you cannot guarentee returns you can knock years off the bond rather

 

[derp90]

bond first you cannot guarentee returns you can knock years off the bond rather

What you are saying is to not put into a TFSA while you have a bond? Rather dump every extra penny into the bond?

 

[Snyper564]

What you are saying is to not put into a TFSA while you have a bond? Rather dump every extra penny into the bond?

100%

We dump every single cent we have in our access bond and settle CC on a monthly basis.

We take money out the bond then if needed.

Its knocked years off our bond.

So it looks like this

spend on CC, get salary, settle CC IN FULL, dump balance in the bond.

Rinse repeat.

 

[derp90]

100%

We dump every single cent we have in our access bond and settle CC on a monthly basis.

We take money out the bond then if needed.

Its knocked years off our bond.

So it looks like this

spend on CC, get salary, settle CC, dump balance in the bond.

Rinse repeat.

Nice, for me I guess it will be:

spend on WW store card for groceries, get salary, settle WW account, put rest in bond

I was originally going to put a bit extra into the bond, but I guess it makes sense to put all extra funds you don't need into it, and then draw it later if you do need it.

 

[Snyper564]

Nice, for me I guess it will be:

spend on WW store card for groceries, get salary, settle WW account, put rest in bond

I was originally going to put a bit extra into the bond, but I guess it makes sense to put all extra funds you don't need into it, and then draw it later if you do need it.

100% you can knock millions off a bond and years with minimal effort.

If you have a bond and you dont have an access/flexi option you are financially damaging yourself if you can make use of it but dont.

There is only one time I would suggest not making use of the flexi option. This is when the income after tax on that money can out earn a bond. ITS VERY RARE thats why I dont suggest it. I have a few crypto related ventures where I pull the money out and pop it back in a month later as it out earns the bond. BUT this is not the norm

 

[derp90]

100% you can knock millions off a bond and years with minimal effort.

If you have a bond and you dont have an access/flexi option you are financially damaging yourself if you can make use of it but dont.

There is only one time I would suggest not making use of the flexi option. This is when the income after tax on that money can out earn a bond. ITS VERY RARE thats why I dont suggest it. I have a few crypto related ventures where I pull the money out and pop it back in a month later as it out earns the bond. BUT this is not the norm

May be a question for a different thread, but what are the benefits you get from putting all your spending on a credit card instead of paying using your bank balance? Is it because then you don't need to keep track of what you need to keep in your bank account for spending each month?

 

[MidnightZA]

May be a question for a different thread, but what are the benefits you get from putting all your spending on a credit card instead of paying using your bank balance? Is it because then you don't need to keep track of what you need to keep in your bank account for spending each month?

If you spend 10k pm on your CC and settle it at the end of the month, you wont pay any interest. That same 10k in the bond will reduce the amount you are paying interest on

 

[Snyper564]

May be a question for a different thread, but what are the benefits you get from putting all your spending on a credit card instead of paying using your bank balance? Is it because then you don't need to keep track of what you need to keep in your bank account for spending each month?

I earn rewards and will rather create an additional month of cash flow. Also the cc is 55 days interest free

For example.

All CC spend is R20k a month.

I can spend that 20k on WW black and earn 1-3%. Thats earning points using someone elses cash and my cash is chilling in the bond.

Month end I settle that 20k and balance goes into the bond.

Not everyone can do this but using proper credit management rewards you big time!

 

[RanzB]

May be a question for a different thread, but what are the benefits you get from putting all your spending on a credit card instead of paying using your bank balance? Is it because then you don't need to keep track of what you need to keep in your bank account for spending each month?

This may also help

 

[derp90]

I earn rewards and will rather create an additional month of cash flow. Also the cc is 55 days interest free

For example.

All CC spend is R20k a month.

I can spend that 20k on WW black and earn 1-3%. Thats earning points using someone elses cash and my cash is chilling in the bond.

Month end I settle that 20k and balance goes into the bond.

Not everyone can do this but using proper credit management rewards you big time!

This sounds great. I have a WW store card, but as soon as they allow me (only started building a credit record few months ago) I will get their credit card and do exactly this, as I do it anyway on their store card, but it would be nice to use it for other purchases too, and then pay it off in full. I never want to pay interest on that type of credit though, so will always do it interest-free.

 

[Thor]

How long before I can renegotiate my bind interest rate

What if I'm better off now than I was when I applied, surely my risk profile is lower now and this the original interest rate should be adjusted?

 

[Snyper564]

How long before I can renegotiate my bind interest rate

What if I'm better off now than I was when I applied, surely my risk profile is lower now and this the original interest rate should be adjusted?

they typically look after 2 years dont hold your breath tho and ensure your extra capital is out cause they can lock that permanently if you request it at that time

 

[derp90]

This may also help

So this is basically saying you must always have all your money in your bond access facility, and then take it out a day before your debit orders come off. Interesting, although I would have to set reminders to do that haha