Pay up existing bond or...

[playa4life]

I am in the position where I could potentially pay up my existing bond. This would free up the cash that I am currently paying onto my bond. The thought was to pay up existing bond. Put tenants into existing house. Use tenant rent plus current amount I am paying into current bond and buy a bigger place.
What are the pitfalls I should be looking out for?
What advice could you seasoned financial gurus give me?
Things you might need to know before giving advise:
Around R500K still outstanding on current bond.
Currently have an Access Bond with Standard bank.
I am 38 years old at the moment.
Wife and my end goal has always been to amass as much paid off property as we can while still working in the hopes that these properties could service us in our retirement and also, at the same time, leave a good inheritance for our 2 daughters.
Please share any and all advice in this scenario.
Thanx

 

[rog163]

Depends on how you feel things are currently in the country, if you not worried about money being locked in here on property(takes time to sell) then go for it, there’s some seriously good deals out there on property. I’m in the same boat as you as only owe a small amount to close the bond but haven’t as I want to be able to pull my cash out of access bond if need be.

 

[Speedster]

I am in the position where I could potentially pay up my existing bond. This would free up the cash that I am currently paying onto my bond. The thought was to pay up existing bond. Put tenants into existing house. Use tenant rent plus current amount I am paying into current bond and buy a bigger place.
What are the pitfalls I should be looking out for?
What advice could you seasoned financial gurus give me?
Things you might need to know before giving advise:
Around R500K still outstanding on current bond.
Currently have an Access Bond with Standard bank.
I am 38 years old at the moment.
Wife and my end goal has always been to amass as much paid off property as we can while still working in the hopes that these properties could service us in our retirement and also, at the same time, leave a good inheritance for our 2 daughters.
Please share any and all advice in this scenario.
Thanx

If possible, pay the outstanding amount in but keep the bond open. When you buy a new place you only have to apply for a much lower bond as you will be able to access the funds in your existing bond
Also, if you're looking to buy properties to rent out consider establishing a family trust and buying the property in the trust.

 

[playa4life]

I havent visited my bank yet, but what implication, if any, would this have on

• The existing house? Deed wise?
• Repayment options?
• Title deed?

I'm not sure I am asking the correct questions so Im hoping that someone is able to read between the lines and fill in the blanks...

 

[me_]

You want to maintain a larger bond on the property that is being rented out as the interest paid from that bond is tax deductible and can be claimed back to offset the rent income. If you pay off that bond completely, you'll have to pay tax on the whole rent income.

It's better to extend your bonds on any rental properties and rather reduce the size of the bond on a property you are living in.

 

[Tman*]

If you are comfortable to buy more property, now is the time.

I am in the same boat, but decided to rather invest surplus funds offshore due to my existing over exposure in property.

Having some liquidity left over is also not a bad idea

 

[bchip]

You want to maintain a larger bond on the property that is being rented out as the interest paid from that bond is tax deductible and can be claimed back to offset the rent income. If you pay off that bond completely, you'll have to pay tax on the whole rent income.

It's better to extend your bonds on any rental properties and rather reduce the size of the bond on a property you are living in.

Most people really seem to get this wrong, effectively the tax deduction really just means
you end up paying 70% of the interest to the bank.
You cannot deduct more than the expenditure you incur.

People who don't have bonds pay 0% interest to the banks...

 

[playa4life]

Can we quickly talk Access Bonds and how I could utilise the existing Access Bond to service the purchase of the new house?
New house's cash price is around double what I paid for my current house. Although, current house value has almost doubled since we moved in about 5 years ago.
Would this mean that the bank would come do an evaluation on existing house's value and extend that bond to cover new house's purchase - meaning I retain existing bond account number (for lack of a better phrase) and by extension I continue to service this "new" (old) bond but just with a new monthly repayment amount?

I hope this makes any sense at all...

 

[playa4life]

I think @me_ was maybe speaking about CGT?
With that being said... What about CGT?

 

[bchip]

You need to consider what happens if things go wrong, not simply focus on if everything goes right.
ie could you still afford payments if there were no tenants for 6 months?
or you were retrenched for 6 months?


CGT relates to the sale of a property, you are not selling at the moment so its not relevant

 

[AchmatK]

Most people really seem to get this wrong, effectively the tax deduction really just means
you end up paying 70% of the interest to the bank.
You cannot deduct more than the expenditure you incur.

People who don't have bonds pay 0% interest to the banks...

Same here. I would rather pay sars a fixed percentage that can easily be calculated based on taxable income than pay the bank +70% in monthly interest charges. Even in the highest tax rate with a bond fully extended, the interest payment will be more than the tax bill.

Also extending a bond on a rental property to purchase a primary property makes the interest non tax deductible. Basically only expenses incurred in generating taxable income is tax deductible.

 

[Speedster]

Most people really seem to get this wrong, effectively the tax deduction really just means
you end up paying 70% of the interest to the bank.
You cannot deduct more than the expenditure you incur.

People who don't have bonds pay 0% interest to the banks...

People without bonds also probably aren't extending their property portfolios

 

[SauRoNZA]

Unless you are going to AirBNB the current place I would just sell it and either pay the new place off faster, or dump it into a property ETF instead of having renters and maintenance and all that kak.

There is a balance to be found somewhere between them.

 

[SauRoNZA]

People without bonds also probably aren't extending their property portfolios

20% of all my investments (outside my home loan itself of course) are going into property.

None of which involves a loan or interest.

 

[me_]

Most people really seem to get this wrong, effectively the tax deduction really just means
you end up paying 70% of the interest to the bank.
You cannot deduct more than the expenditure you incur.

People who don't have bonds pay 0% interest to the banks...

Except OP wouldn't have no bond - he would have a bond on his primary residence instead of his investment property which would not be tax deductible. So he would be paying interest on the loan for the primary residence and paying income tax on rental income.

If the amount he has to borrow is fixed then taking a larger portion of this from the investment property would mean that he would not have to pay income tax on the rental income.

 

[Speedster]

Can we quickly talk Access Bonds and how I could utilise the existing Access Bond to service the purchase of the new house?
New house's cash price is around double what I paid for my current house. Although, current house value has almost doubled since we moved in about 5 years ago.
Would this mean that the bank would come do an evaluation on existing house's value and extend that bond to cover new house's purchase - meaning I retain existing bond account number (for lack of a better phrase) and by extension I continue to service this "new" (old) bond but just with a new monthly repayment amount?

I hope this makes any sense at all...

You could contact the bank and ask them to re-extend (I forget the technical term) to the original loan amount. Costs associated with this are minimal.

In order to increase the bond amount beyond the original, a new bond will need to be registered with the associated costs.

 

[Speedster]

20% of all my investments (outside my home loan itself of course) are going into property.

None of which involves a loan or interest.

Fantastic. What sort of leverage are you getting on those property investments?

 

[SauRoNZA]

Fantastic. What sort of leverage are you getting on those property investments?

Leverage is a different game obviously, but that is also a bit of moving the goal posts.

Most people who are buying second properties have no concept of leverage though, so I don't think it should be applied universally.

If that is, however, the motivation over doing an ETF for the same asset class then by all means.

Personally, I just prefer it as a much less messy and involved approach and letting someone else do the work.

You could of course go the route of gearing an ETF as well, but not something I have quite the stomach for and much harder than a home loan that's for sure.

*****

Then again you could use the current home loan and keep it in play to essentially gear an ETF.

 

[Polymathic]

I am in the position where I could potentially pay up my existing bond. This would free up the cash that I am currently paying onto my bond. The thought was to pay up existing bond. Put tenants into existing house. Use tenant rent plus current amount I am paying into current bond and buy a bigger place.
What are the pitfalls I should be looking out for?
What advice could you seasoned financial gurus give me?
Things you might need to know before giving advise:
Around R500K still outstanding on current bond.
Currently have an Access Bond with Standard bank.
I am 38 years old at the moment.
Wife and my end goal has always been to amass as much paid off property as we can while still working in the hopes that these properties could service us in our retirement and also, at the same time, leave a good inheritance for our 2 daughters.
Please share any and all advice in this scenario.
Thanx

If you are not the type of person who saves money, that extra cashed freed up will just go down the drain.

 

[LostGoat]

Most people really seem to get this wrong, effectively the tax deduction really just means
you end up paying 70% of the interest to the bank.
You cannot deduct more than the expenditure you incur.

People who don't have bonds pay 0% interest to the banks...

Sure but by not putting the money into your bond you will have more money available to invest. And due to the interest savings you will need to make a lower return on that money for it to be worthwhile.
e.g If you your bond was at 10% and you had 100k. You could pay off the bond and save 10k.
i.e your ending position after a year is no bond. And 10k in the bank. (the 10k extra you could save as it did not go to paying interest)
Alternatively you could invest that 100k elsewhere and not pay off your bond.
Assuming a marginal tax rate of 40% your ending position would be the 4k tax refund plus the after tax amount from the 100k investment.
Therefore from the 100k I only need to make more then 6k after tax to be better off. If it was a primary residence with no tax refund you would need to make more then 10k after tax to better off then paying your bond.
Personally I feel confident that I could make more then 6% after tax and therefore would be better off keeping the bond on a rental property. The 10% would be harder.

Obviously these figures change based on your marginal tax rate, bond interest rate and how much tax you will be paying on your investment.

But in the OP case I am assuming he would take a new bond on second property he wants to buy to live in. In that case it would not make sense at all to pay in 500k into the rental bond and take out a new bond of 500k more on the property he is living in. As he will lose the interest saving and not have the 500k to invest.