Savings vs deposit

Ngoaka asks: I bought my one-bed 57-square-metre townhouse in 2007 for R380 000 with a R10 000 deposit.

To date I have paid R330 000 through sporadic lump-sum deposits and regular over-the-official-instalment payments. The balance on my property is approximately R40 000.

By December this year I project to have R80 000 made up of my 32-day notice, bonus and other ETF and unit trust savings.

My plan is to rent the unit I am currently staying in and buy a two-bed 73-square-metre townhouse worth R650 000.

Should I use half (R40 000) of my projected amount in December to pay off my bond or use it as a down payment on the two-bed purchase?

Maya replies: Firstly, congratulations on being so financially disciplined. You have nearly paid off your home in just three years. Just shows what you can achieve if you apply some financial discipline.

Long-term savings
In terms of using your savings, remember that your exchange-traded funds (ETF) and unit trusts are long-term savings so you should not be cashing those in but rather add to them so that you have savings in the future. It is important to balance paying off your mortgage with savings in a growth investment. When you want to make a lifestyle change later in life, you need to have some savings available.

Tax affect
From a tax point of view it would make more sense to pay a larger deposit on your new home than pay off your rental property.

Remember that the rental you will receive will attract income tax so you want to be able to offset that against your mortgage repayment so that you can lower the tax paid. (Only the interest charged and levies and maintenance are tax deductible).

In fact speak to your bank as you may want to marginally increase the mortgage on your rental home and use that borrowing to put down a bigger deposit on the new place in order to optimise your tax position.

You need to make sure, however, that the rental covers the mortgage, rates and maintenance and gives you a leeway of about 10% should interest rates increase.

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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