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Invest in your bond

By unknown | Nov 28, 2006 | COMMENTS [ 0 ]

Isaac Moledi

Isaac Moledi

MortgageSA believes that investing in your bond is your best bet in a rising interest rate environment.

Saul Geffen, of MortgageSA, said that as interest rates rise homeowners have an even bigger incentive to invest in their bonds because they will be saving even more interest while benefiting from the secondary advantage of a shorter term of repayment.

Geffen said that when interest rates rise putting money into your bond guarantees a bigger interest saving.

"Though people understand this intuitively, they don't realise that paying extra sharply reduces the time it takes to repay a bond because the interest savings are so significant."

According to him, it's always a good idea to get bond-free as soon as possible because of the interest savings.

"When rates rise, paying extra funds into your bond means you're saving substantial amounts of interest.

"It's also worth bearing in mind that in a period of rising interest rates stock markets have historically tended to struggle, so putting any extra cash into a bond makes very good sense," said Geffen.

He gave the example of a house worth R800000 and an owner able to borrow at 1percent below prime, at 9,5percent, before rates started to rise. The owner secured a 100percent bond over 20 years.

Geffen said this would mean a monthly repayment of R7617m,14. If the owner decided to pay an extra R1000 a month into his bond it would result in an interest saving of R301251,17 and the 20-year term would be reduced to just over 14 years and 8 months.

"With rates 1percent higher, the monthly repayments are R8151,37. An extra R1000 would mean an interest saving of R353144,58 and would reduce the bond term to 14 years and six months."

Geffen said that if rates rose another percent the monthly repayment would rise to R8699,67. Paying an extra R1000 a month in this environment would give an interest saving of R408137,72 and reduce the bond term to about 14 years and four months.


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