Paid up access bonds

[Merlin]

Hello everyone,



I purchased my first property this year. It was purchased with a relatively small bond, thanks to dedicated, aggressive saving. I converted the bond to an access bond shortly after it was registered.

I expect to be in a position to pay the residual bonded amount next year.

For context, I rent the property out. My current living situation means that it pays me to rent it out rather than live there.

I'm aware that maintaining the bond presents taxation benefits, however my view is that the hit that I'll take on the rental income from SARS is less than the interest knock I take on a monthly basis at present.

The plan is to clear the bond so that I can restart rebuilding my savings, to take advantage of compound interest, perhaps with a view to putting a deposit down on a second property a little way down the road.

I know that I will need to notify the bank three months ahead of a final payment, to avoid a penalty.

What I'd like to know is whether it is possible to keep a paid up access bond open, and if so, what this entails? Are there pros and cons with this?

I'd like to have the option of lending against my property if need be.

Thanks.

 

[PaulGherkin]

I think so, I have heard of people doing this.

 

[zerocool2009]

Hello everyone,



I purchased my first property this year. It was purchased with a relatively small bond, thanks to dedicated, aggressive saving. I converted the bond to an access bond shortly after it was registered.

I expect to be in a position to pay the residual bonded amount next year.

For context, I rent the property out. My current living situation means that it pays me to rent it out rather than live there.

I'm aware that maintaining the bond presents taxation benefits, however my view is that the hit that I'll take on the rental income from SARS is less than the interest knock I take on a monthly basis at present.

The plan is to clear the bond so that I can restart rebuilding my savings, to take advantage of compound interest, perhaps with a view to putting a deposit down on a second property a little way down the road.

I know that I will need to notify the bank three months ahead of a final payment, to avoid a penalty.

What I'd like to know is whether it is possible to keep a paid up access bond open, and if so, what this entails? Are there pros and cons with this?

I'd like to have the option of lending against my property if need be.

Thanks.

Keep it open, its an emergency fund if you need money asap! (Best trick in the world), it saved me thousands and thousands.

Example, I have a bond paid up in 2010, still open, my monthly fee is R5.75. So if I need in an emergency cash, its available.

I would personally start to look now for property nr 2 (if I where you, and use funds accordingly).

 

[Merlin]

Fantastic.

Thank you.

 

[zerocool2009]

What I do ...

If I see I am pushing my bonds, and have some surplus money paid up, then I borrow against it AGAIN!

Hope it makes sense.

 

[Ecco]

my monthly fee is R5.75.

Who is your bond with? I wish mine was this low. It 10x that amount to be exact - at FNB

 

[zerocool2009]

Who is your bond with? I wish mine was this low. It 10x that amount to be exact - at FNB

FNB! The trick is, once you have a bond, they cant just "up" the credit costs. I have bonds also at R69 a month.

 

[deweyzeph]

Just remember though that once the bond is paid off early, the available credit amount in the bond will decrease every month inline with the original amortization schedule.

I'm aware that maintaining the bond presents taxation benefits, however my view is that the hit that I'll take on the rental income from SARS is less than the interest knock I take on a monthly basis at present.

It makes no financial sense to spend money to save tax. That's like donating R100 to a registered charity so you can get R45 back as a tax deduction. Great, you've got R45 back but you've still lost R55. Taking out a loan so you can write off the interest against your rental income tax is just like that.

 

[Merlin]

Just remember though that once the bond is paid off early, the available credit amount in the bond will decrease every month inline with the original amortization schedule.

Hi deweyzeph,

I'm not sure that I understand this point correctly.

If, for argument's sake, I have access to 500k in my paid up access bond, and there are 15 years remaining on the bond, why would I not be able to borrow up to 500k from the bond across that span of time, assuming of course that every cent is paid back before day X?

It makes no financial sense to spend money to save tax. That's like donating R100 to a registered charity so you can get R45 back as a tax deduction. Great, you've got R45 back but you've still lost R55. Taking out a loan so you can write off the interest against your rental income tax is just like that.

At the moment I pay X in interest on my bond repayment every month.

I earn Y from renting out the unit. Obviously SARS will tax me on this income.

From a taxation perspective, if I am currently registering a monthly loss, as my expenditure on the property exceeds the income derived thereof, this is a positive.

However, to my mind, the tax hit that I take on the income derived is less than the sum I piss away in bond interest every month, hence I want to clear the bond ASAP.

I can then take what I was spending on repayments to rebuild my capital, either to earn compound interest on the cash, or to put it towards a second property.

 

[deweyzeph]

Hi deweyzeph,

I'm not sure that I understand this point correctly.

If, for argument's sake, I have access to 500k in my paid up access bond, and there are 15 years remaining on the bond, why would I not be able to borrow up to 500k from the bond across that span of time, assuming of course that every cent is paid back before day X?


At the moment I pay X in interest on my bond repayment every month.

I earn Y from renting out the unit. Obviously SARS will tax me on this income.

From a taxation perspective, if I am currently registering a monthly loss, as my expenditure on the property exceeds the income derived thereof, this is a positive.

However, to my mind, the tax hit that I take on the income derived is less than the sum I piss away in bond interest every month, hence I want to clear the bond ASAP.

I can then take what I was spending on repayments to rebuild my capital, either to earn compound interest on the cash, or to put it towards a second property.

When you take out a bond, there is a certain amount of the capital that must be paid back every month according to an amortization schedule. If you pay off a bond early in an access bond, that amortization schedule does not fall way. The capital will instead be deducted from the "available amount" meaning as you get closer and closer to the expiry date of the bond, less and less of the capital you have paid off early is available for you to reborrow until finally you get to the expiry date of the bond where effectively nothing is available for you to reborrow.

As for the interest, my point is simply that if you choose to buy a property to rent it out and you have the cash to buy it straight, or the option to take out a bond, you will always be better off by paying cash for it because the amount of tax you pay after deducting the interest payment from the rental income will always leave you worse off than if you didn't pay any interest at all. In other words, the interest deduction does not make up for the fact that you are paying interest in the first place.

Now of course, what you could do is reborrow that money and use it for something else unrelated to the property that the bond was originally issued against, and deduct the interest against the rental income, but that is probably illegal, because the interest was not technically used in the generation of the rental income you're offsetting it against.

 

[Pegging]

Who is your bond with? I wish mine was this low. It 10x that amount to be exact - at FNB

Same here.
R57.50
Taken out in 2011.
They do increase that fee.

 

[Pegging]

Keep it open, its an emergency fund if you need money asap! (Best trick in the world), it saved me thousands and thousands.

Example, I have a bond paid up in 2010, still open, my monthly fee is R5.75. So if I need in an emergency cash, its available.

I would personally start to look now for property nr 2 (if I where you, and use funds accordingly).

What does paid up mean?

Do you owe zero on the bond since 2010?
Have you not had to make a payment since 2010?

 

[zerocool2009]

What does paid up mean?

Do you owe zero on the bond since 2010?
Have you not had to make a payment since 2010?

Paid up in my view, you owe R0 outstanding, but not closing or cancelling it

Zero payment (besides the monthly admin cost which is compulsory for having the facility open or available)

 

[Merlin]

When you take out a bond, there is a certain amount of the capital that must be paid back every month according to an amortization schedule. If you pay off a bond early in an access bond, that amortization schedule does not fall way. The capital will instead be deducted from the "available amount" meaning as you get closer and closer to the expiry date of the bond, less and less of the capital you have paid off early is available for you to reborrow until finally you get to the expiry date of the bond where effectively nothing is available for you to reborrow.

As for the interest, my point is simply that if you choose to buy a property to rent it out and you have the cash to buy it straight, or the option to take out a bond, you will always be better off by paying cash for it because the amount of tax you pay after deducting the interest payment from the rental income will always leave you worse off than if you didn't pay any interest at all. In other words, the interest deduction does not make up for the fact that you are paying interest in the first place.

Now of course, what you could do is reborrow that money and use it for something else unrelated to the property that the bond was originally issued against, and deduct the interest against the rental income, but that is probably illegal, because the interest was not technically used in the generation of the rental income you're offsetting it against.

Thank you, deweyzeph.

Got it. Much appreciated.

I needed the bond to cover a small gap between my savings and the purchase price earlier this year. I took a chunk more than what I needed, for surety. By the time the colossal cluster #$%^ the lawyers made was sorted out, I was able to make sufficient changes to my financial setup that I repaid 3/4 of the bond before the first repayment.

For now, it's a comfortable situation to pay off the residual on a monthly basis.

 

[rh1]

When you take out a bond, there is a certain amount of the capital that must be paid back every month according to an amortization schedule. If you pay off a bond early in an access bond, that amortization schedule does not fall way. The capital will instead be deducted from the "available amount" meaning as you get closer and closer to the expiry date of the bond, less and less of the capital you have paid off early is available for you to reborrow until finally you get to the expiry date of the bond where effectively nothing is available for you to reborrow.

As for the interest, my point is simply that if you choose to buy a property to rent it out and you have the cash to buy it straight, or the option to take out a bond, you will always be better off by paying cash for it because the amount of tax you pay after deducting the interest payment from the rental income will always leave you worse off than if you didn't pay any interest at all. In other words, the interest deduction does not make up for the fact that you are paying interest in the first place.

Now of course, what you could do is reborrow that money and use it for something else unrelated to the property that the bond was originally issued against, and deduct the interest against the rental income, but that is probably illegal, because the interest was not technically used in the generation of the rental income you're offsetting it against.

This actually make sense:

Original loan R2million over 20 years.

You pay it off over 7 years. If you currently in year 10, it means that you only have R1 million available.

 

[deweyzeph]

This actually make sense:

Original loan R2million over 20 years.

You pay it off over 7 years. If you currently in year 10, it means that you only have R1 million available.

Exactly. You can apply to extend your bond based on the current market value of your property and regain access to that capital, but this can put you in a very tricky situation with capital gains tax where the amount of the loan outstanding when you sell the house leaves you with not enough money to pay the capital gains tax on the property. You really need to be careful if you ever go down this route, especially with a rental property where there is no primary residence exclusion for CGT.

 

[zerocool2009]

My honest view, you paid alot to get the facility going. Why do you want to close it ? (even if you hit 20 years, just reset the term).

Its money at your finger tips. Closing it is just silly, but people think having the paper of the deed in his or her hand is power. Its sensible if you cant live with debt (as its just a mindset).

 

[Jehosefat]

Hi deweyzeph,

I'm not sure that I understand this point correctly.

If, for argument's sake, I have access to 500k in my paid up access bond, and there are 15 years remaining on the bond, why would I not be able to borrow up to 500k from the bond across that span of time, assuming of course that every cent is paid back before day X?


At the moment I pay X in interest on my bond repayment every month.

I earn Y from renting out the unit. Obviously SARS will tax me on this income.

From a taxation perspective, if I am currently registering a monthly loss, as my expenditure on the property exceeds the income derived thereof, this is a positive.

However, to my mind, the tax hit that I take on the income derived is less than the sum I piss away in bond interest every month, hence I want to clear the bond ASAP.

I can then take what I was spending on repayments to rebuild my capital, either to earn compound interest on the cash, or to put it towards a second property.

It amortizes down along the original loan profile so that you can't withdraw all R500k the day before the term is up which you would then be required to settle the following day.

If you are going to be incurring interest by investing in a second property, it makes way more sense to incur the interest on the investment property because you can offset that interest against the rental income whereas if you are incurring the interest on your primary residence you cannot offset it. So you will pay the same amount of interest in both cases but in one case you will pay less tax than the other. Obviously if the second property is also going to be rented out it makes no difference on which property the interest is accrued.

 

[Merlin]

It amortizes down along the original loan profile so that you can't withdraw all R500k the day before the term is up which you would then be required to settle the following day.

If you are going to be incurring interest by investing in a second property, it makes way more sense to incur the interest on the investment property because you can offset that interest against the rental income whereas if you are incurring the interest on your primary residence you cannot offset it. So you will pay the same amount of interest in both cases but in one case you will pay less tax than the other. Obviously if the second property is also going to be rented out it makes no difference on which property the interest is accrued.

Thanks,. Jehosefat.

 

[Cius]

Yep, know a few who do this and it's best to keep the bond open as long as possible. I know a guy who could pay off properties easily enough but just keeps extra money in the bonds but ensures the full bond repayment goes off each month so he can offset that against his rental income while also not paying much interest on the bond. Reduces tax on the income a lot if structured this way apparently. At least so I have heard.