Don't close your home loan account just yet.

Only a small percentage of homebuyers can afford to pay cash for their
properties, with the majority relying on home loans that can cost them up to
30 percent of their monthly income in repayments.

So it is not surprising, says Kevin Lancaster, CEO of leading mortgage
originator Betterbond, that many people strive to pay off their loans and be
"bond free" as quickly as possible

"However, closing your home loan account completely is not necessarily the
best course of action.

"For a start, there is more than a strong likelihood that you will need to
borrow money sometime in the next few years to finance an education, a car,
or even another property. And borrowing against the increased equity in your
home - by extending an existing mortgage - will undoubtedly be the cheapest
way to do this. This is reason enough to keep your home loan account open,
even if there is currently only a nominal amount owing

"Also, the longer you stay in your home, the greater the danger of becoming
'house rich and cash poor' - owing nothing on your home but lacking
sufficient funds for the upkeep of the property, including rates and taxes
and insurance as well as routine maintenance. But the value of your home
will certainly increase over time, creating equity that you can use to
maintain it - provided your home loan account is still open."

Meanwhile, Lancaster says, those who are using a large chunk of their
discretionary income to quickly reduce a home loan can rest assured that
this is one of the best investments they could be making.
Taken over the past 20 years, he explains, the real (after inflation) return
from paying off a home loan has been around 17 percent a year - thanks to
high interest rates and the fact that "investments" in your bond are
effectively tax-free.

"When you put extra money towards paying off your home loan, what you are
actually doing is eliminating an expense that is not tax-deductible, which
is the same as making a tax-free investment."

At the moment, he acknowledges, the real rate of return on paying off your
bond is only 5,5 to 6,5 percent a year, because inflation is running at
around four percent and the interest rate on home loan borrowings at a low
9,5 to 10,5 percent, "and with the stock market doing so well, there are
many who believe they would do better to invest in shares instead of putting
extra cash into their home loan account.

"There are, though, a couple of important things to consider, the most
obvious being that share investments are much more volatile than home loans,
so while you could make better returns, you could easily also make worse
ones - and shares have proved to deliver lower returns than home loans over
the past 12 years."

Loading comments
More news articles
Guidelines to securing a home loan
29 May 2018
Many young South Africans are working hard to achieve their dream of purchasing their first home. However, the process can be challenging due to the daunting application process, which can take up to 2 years and is often enough to discourage prospective buyers.
read more
Things you should consider before upgrading to a new home
23 Apr 2018
The thing about the property ladder is that at some point in our lives we all have reason to want to climb a rung or two higher. Sometimes, it’s because we’ve outgrown our previous dream home, or because we want to be in a better neighbourhood that’s closer to work or to schools. Sometimes it’s because our circumstances have changed, and we’re taking care of elderly parents or relatives. Sometimes, it’s just because we want a property that reflects the financial status our hard work has won.
read more
Get pre-qualified
Make offers with confidence knowing what you can afford. Then shop for the best home loan
Bond Calculator
Calculate the estimated repayments on a home loan and savings with extra payments