Pay up existing bond or...

sloe-joe said:
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.
Click to expand...
I would really check these numbers again...
It also ring-fenced to the income derived.
Your also missing out on a lot of extra expenses, like x2 property rates, so your not even looking at half of the equation.

sloe-joe said:
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.
Click to expand...
This confidence didnt really pan out for most people over the past few years.
Let us know where you currently invest with such confidence.

Stocks:
1561546466517.png

Property
https://businesstech.co.za/news/pro...-on-the-market-in-south-africa-look-away-now/

“Although the market remains active, we are still trading at 20%-40% below the 2015-2017 highs,” he said.
 
Last edited:
bchip said:
This confidence didnt really pan out for most people over the past few years.
Let us know where you currently invest with such confidence.
Click to expand...

6% on R100k? A twelve month fixed deposit will give you more than that (and won't breach the threshold for tax unless you're also earning interest in other tax-inefficient investments). Of course this changes if the amount increases from R100k to whatever puts you near the tax threshold on interest earned.
 
3WA said:
6% on R100k? A twelve month fixed deposit will give you more than that (and won't breach the threshold for tax unless you're also earning interest in other tax-inefficient investments). Of course this changes if the amount increases from R100k to whatever puts you near the tax threshold on interest earned.
Click to expand...

A fixed deposit is heavily taxed on the interest portion.
The interest exemption is R23,800 which means that any investment above R 297,500 @ 8% is taxed.

I didnt quite take the 100k as literal, as I dont know of anyone houses that are selling for R100k
If you apply the same concept on R1mil then you do go over the threshold and you need
to deduct the tax you would be paying on the bonds as well, which effectively will be about 2-3%

So 8% bond returns really mean about 6% real return before inflation.
The 6% is also an incorrect target, more realistically (after all expenses) you need to outperform around the interest paid (so above 10%) for this arbitrage to be effective (the calcs that calculated 6% were wrong)
 
bchip said:
The 6% is also an incorrect target, more realistically (after all expenses) you need to outperform around the interest paid (so above 10%) for this arbitrage to be effective (the calcs that calculated 6% were wrong)
Click to expand...

Agree about the dangers when getting near the tax threshold (after all OP is dealing with R500k, not R100k).

Can't see the problem with the maths that gets to 6%. After all, it's also factoring in the tax break you get from running your rental property at a loss.
 
Reading through this thread tells me there's experts in here. So my question:

I've got a bond on a property i'm renting out. What part can i deduct from tax ?
 
3WA said:
Agree about the dangers when getting near the tax threshold (after all OP is dealing with R500k, not R100k).

Can't see the problem with the maths that gets to 6%. After all, it's also factoring in the tax break you get from running your rental property at a loss.
Click to expand...

You sure if included everything in the calc, from rebates to costs included when moving over
to that scheme?
 
HunterNW said:
Reading through this thread tells me there's experts in here. So my question:

I've got a bond on a property i'm renting out. What part can i deduct from tax ?
Click to expand...

The interest portion of the bond payment.
 
bchip said:
A fixed deposit is heavily taxed on the interest portion.
The interest exemption is R23,800 which means that any investment above R 297,500 @ 8% is taxed.

I didnt quite take the 100k as literal, as I dont know of anyone houses that are selling for R100k
If you apply the same concept on R1mil then you do go over the threshold and you need
to deduct the tax you would be paying on the bonds as well, which effectively will be about 2-3%

So 8% bond returns really mean about 6% real return before inflation.
The 6% is also an incorrect target, more realistically (after all expenses) you need to outperform around the interest paid (so above 10%) for this arbitrage to be effective (the calcs that calculated 6% were wrong)
Click to expand...

The 100k was just an arbitrary round number to make the maths easy. As the amount changes so does the tax you would pay on the income derived from the investment. I kept this non specific by just saying the after tax amount needs to beat 6%.
Therefore if it was a primary residence which does not qualify for the tax break I would need to beat 10% after tax to make it worthwhile to not pay off my bond. With a rental property I would need to beat 6% (If my calculation for the 6% was wrong I am not sure where but let me know and I can adjust the figures).

I said I personally believe that I could beat 6%. Obviously there is an element of risk which I would have to undertake which would not exist if I was paying of my bond. Don't really want to get involved in what percentage you can expect to make was just trying to stick to the principles. What you believe you can make and the risk you are are personally prepared to take will obviously factor in.
Basically I was trying to make the point that the opportunity cost of the money you put into the bond needs to be taken into account.

I am not sure what is wrong with the maths to get the 6%. You mentioned costs that I am not taking into account such as 2X property rates. But I did not mention buying an additional property I was specifically speaking about paying of the rental property. So not sure what costs I forgot.

With the article on the property market you posted again I am not suggesting buying a property. Personally I am against buying property but that is a very subjective discussion.
 
sloe-joe said:
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.
Click to expand...

There is of course also the option to fund a TFIA account with the money and negating the tax altogether.

Only kak is you need to drip feed it.
 
My two cents worth.

Debt is the one thing that drags us down, there are calculators out there to show you how much interest you save by putting in amounts higher than your bond repayments, and over the long term, it can total hundreds of thousands of rands saved... So my view is always to get your debt paid off as soon as possible - it's unlikely that you'll be able to get more value from the money through investments than you will through saving on the interest. As someone said above, if your bond is 10%, you'll have to be pretty good a investing to get get more than 10% return on an investment.

The other factor to consider is that interest rates change, and there is always the possibility that they increase (and decrease) - so that's another factor that we;re dragged around with.

I think it's worth keeping the facility open though, because you'll save on bond registration costs (assuming it is sufficient for another home) and bank fees, which can total tens of thousands of Rands.

On the point of renting out your place, I looked long and hard into this - if you can get it right, you can definitely make a lot of money, having a tenant pay off a bond (or most of it) - practically, I've spoken to plenty of people from both sides, and if you get a bad tenant, you're in for a nightmare. Do yourself a favour and read about the nightmare stories, to see if this is a form of investing you'd be okay to take the risk of getting into
 
sloe-joe said:
I am not sure what is wrong with the maths to get the 6%. You mentioned costs that I am not taking into account such as 2X property rates. But I did not mention buying an additional property I was specifically speaking about paying of the rental property. So not sure what costs I forgot.
.
Click to expand...
I literally got this from the 1st post which described the topic as taking out a loan to buy a rental property.

Also you only get the interest rate deduction if you are doing a buy to let.
You cant deduct interest rate against earnings from dividends.

So not sure where you are investing that you can still get the deduction on a not secondary house ?
 
bchip said:
I literally got this from the 1st post which described the topic as taking out a loan to buy a rental property.?
Click to expand...

I understood it as the reverse. i.e he wanted to pay off the loan of the house he is currently living in. Then move out and take a loan to buy a new house which he will live in. While renting the old one.
As he said "Put tenants into existing house. Use tenant rent plus current amount I am paying into current bond and buy a bigger place. "

That is why in the last paragraph I was saying he should put the 500k into the new house he will be buying and living in instead of paying off the old house that he plans to rent.
In the other paragraphs I was just talking about in general the disadvantages of paying of rental property as he indicated he wants to purchase and pay off multiple properties in the future. (Which I assumed he was going to rent out).
 
HunterNW said:
Indeed. I don't mind paying for a service, but, then this service should deliver.
Click to expand...

Your tax lady sounds like the equivalent of a plumber who’s never seen a tap before!
 
3WA said:
Your tax lady sounds like the equivalent of a plumber who’s never seen a tap before!
Click to expand...
Just waiting for my medical contribution tax certificate then i'll have a talk with her, or her boss.
 
My view on this is maybe too simplistic for your situation, but basically, pay off everything you can. The less you owe the bank (or anyone), the better you'll sleep at night.
 
sloe-joe said:
I understood it as the reverse. i.e he wanted to pay off the loan of the house he is currently living in. Then move out and take a loan to buy a new house which he will live in. While renting the old one.
As he said "Put tenants into existing house. Use tenant rent plus current amount I am paying into current bond and buy a bigger place. "

That is why in the last paragraph I was saying he should put the 500k into the new house he will be buying and living in instead of paying off the old house that he plans to rent.
In the other paragraphs I was just talking about in general the disadvantages of paying of rental property as he indicated he wants to purchase and pay off multiple properties in the future. (Which I assumed he was going to rent out).
Click to expand...
You've hit the nail on the head wrt what I was thinking...
 
You must log in or register to reply here.
Back
Top
Sign up to the MyBroadband newsletter
X