When to pay off your home

Karabo currently rents a flat and has inherited a lump sum which will enable her to buy a townhouse without a mortgage.

“Should I invest in in equities for seven to 10 years and get a 15-year bond or should I buy the property outright and invest each month what I would be saving in bond repayments? In which scenario would I be better off in 10 years’ time?”

Maya replies: Based on additional information you provided you are clearly someone who manages their money well. No matter what decision you make, you will be financially secure in 10 years’ time because it is your attitude towards money, rather than how much money you have, that determines your financial success.

With regards to your investment decision, there is no right or wrong answer but my personal belief is that if you have the opportunity to pay off debt that is the best risk-free return you can get.

For example if you had a mortgage your interest would be about 9% a year.

If you invested in equities you could expect about 12% return in the current low return environment.

That means technically you would have a 3% higher return by investing in equities than in the debt, but that would come with two significant risks.

Market volatility
The stock market does not go up in a straight line and there is always the risk of losing capital in the short-term.

Interest rate increases
It is unlikely we will see further rate cuts and economists expect interest rates to increase in 2012, so your repayments would increase, reducing the gap between the mortgage and the equity returns.

Of course the equity market could surprise on the upside and you could see even higher returns but remember you would still be investing each month into the equity market, so in a way you would have the best of both worlds. If you invested R3 500 a month you could expect to have nearly R3,5-million saved up over the next 20 years.

The costs of buying a home
Based on the information you provided, you would probably still need to have a small mortgage bond if you bought a townhouse for R400 000.

There would be transfer costs, moving costs and probably some spending on new furniture or maintenance which would use up the deposit you have saved. You should also not dip into your emergency savings which should be kept for emergencies. This would leave you with a shortfall of around R80 000. You could opt for a cheaper property or take out a mortgage. If you paid it off over five years you would pay about R1 700 a month.

Also remember you will have home insurance, maintenance costs and rates and taxes which you do not currently pay as a tenant, so build these all into your budget.

Read more news, blogs, tips and Q&As in our Smart Money section. Post questions on the site for independent and researched information.

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Maya Fisher French
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