Homeloans as an investment

(Residential) CAPE TOWN (November 05) - People wondering what do with their money as the world’s financial markets suffer wild swings should look to the certain returns to be had in their home loans advises bond originator, ooba.

Jenny Rushin, provincial sales manager at ooba, says that an investment into a bond gives a certain rate of return equal to your home loan rate.

“People are full of fear right now and wondering what they should do with their money - but one of the best options is right under our noses.

“If for example you have a R1m home loan at a rate of 14% (one and half percent below prime), on each extra rand you put into that bond you are effectively earning 14% on that money.

“And earning a certain 14% on your money is an excellent return and of course putting that bit extra into the bond brings you closer to becoming bond free. Numerous studies have shown that putting extra cash into your bond is consistently one of the best performing investments.”

Rushin points out the high interest rates in Souht Africa, while uncomfortable for home owners, does underscore the investment case for investing in a home loan given the massive interest savings benefits.

“Taking the example above, a home owner would have to pay R12 440 on a R1m bond at the moment had he borrowed at 14%. Putting R1 000 extra into his bond each month means an interest saving of R635 750,14 and drops the repayment period to 14,58 years assuming it was a standard 20 year home loan to start with.”

To illustrate just how much of an interest savings that can be achieved in a high interest rate environment, compare that to borrowing R1m at 10%. In this lower interest rate scenario, the monthly repayments are R9 650 a month on a 20 year loan.

“Let’s say a home owner decides to put R1 000 a month extra into his, or her, home loan in this environment; the interest saving is now R359 494,09 or R277 256,05 less than the high rate environment. The extra investment reduced the time taken to pay off the home loan to 15,33 years.”

Rushin also says that even in these tough times, each little bit extra invested into a home loan is worthwhile.

“Just skipping a few pricey coffees here and there means you could invest an extra R100 a month into a bond. On a R1m bond financed at 14% over 20 years, that means a saving of R99 536,43.