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[TOP STORY] Is the idea of a ‘paid-off’ home loan still winking at you?

Rather than using extra cash to pay off your mortgage faster, put it into a personal investment vehicle which grows at a higher rate: Marcel Wasserman, independent advisor.

SIMON BROWN: I’m chatting now with Marcel Wasserman, independent financial and investment advisor. Marcel, I appreciate the early morning time. You put out an email earlier in the week about paying off your home loan. This just wasn’t about should you pay it off quickly – The agreement is to pay it off as quickly as possible – absolutely. But you’ve got a different idea of doing it. Instead of sticking the [extra] money into the home loan account, you actually say, hang on, divert it to investments instead?

MARCEL WASSERMAN: Morning Simon. Yeah, that’s exactly so. Over the years we’ve done the numbers and, funnily enough, paying off your home early is still good, but not into your home loan. Rather put [the funds] into an investment which grows at a higher rate.

SIMON BROWN: The point around it, I suppose, is that over time – and not every period and certainly not so far in 2022 – your home loan is going to be X – [and] you can potentially get a couple of extra percentage points by putting it into an investment. What you then say is that at the end of the period, when you’ve got enough cash, take it, pay off the loan and be done with it.

MARCEL WASSERMAN: Yes, exactly. The main thing that people understand or don’t understand about the home loan is that they think it’s a sort of investment vehicle or a money-loaning facility.

The better option is to get into the habit of creating your own investment vehicle, your own fund that you can withdraw from, not only to pay off your house but to do all sorts of things that you might need – to fix the roof and these kind of things – instead of using a loan facility.

SIMON BROWN: I take your point. The other thing you were saying is that part of the problem is we put money into the home loan, we dip in, we grab the money, but what we are also doing is we are buying new houses. We keep on upgrading or downgrading our homes and we have good intentions, but we never get that loan paid off.

MARCEL WASSERMAN: Yeah. That’s the worst. I’m even guilty of that myself. So you would buy the house, like you said, and you actually diligently start paying it off – 10% extra a month and you maybe live there 10 years. Now the kids have maybe grown up or moved out the house or something has changed and you go to a different area. When you get to the new place – maybe not even a more expensive house – you realise, oh well, I would actually like a double garage. I’m going to pay for that myself. I want to put in a pool, obviously. If you look again, all the money you’ve saved to pay off your home early you’ve now spent on fixing up the house again.

SIMON BROWN: I’ve seen that. My sister’s amazingly diligent at putting aside the money, then she’s always, as you say, upgrading the pool or something here or something there.

You also make the point that, as much as we want to pay off our home loan as quickly as possible – for most of us it is going to be by a long way our biggest debt – it’s good debt in a sense. It’s not the horrors of expensive credit card or unsecured debt.

MARCEL WASSERMAN: Yes, this is true. So your home loan, the way it’s calculated is it’s very, very cheap debt, very good debt in that sense. But at the end of the day, though, one must still be careful. Debt is still debt. So as long as you’ve got a good plan like ‘I’m going to pay off this house; with this house that’s being paid off, it improves my cash flow at the end of the day’ then we are getting into the right area. But if you have to keep on renting, you’ll never get into that place where you’re going to be able to live off – or be in – an asset where you actually can live. You don’t have to pay any more rent and that’s why I say it’s good debt because it puts you in a better position than before you took that loan.

SIMON BROWN: And our home has proper utility. The other debate out there, the conventional wisdom – which I’ve never liked, but I’ve never had an argument against, it just intuitively made no sense to me – someone pays off their home loan and they leave R10 in there and they then keep the account open. I don’t know why because, if nothing else, banks are going to charge you fees because banks like fees. You say, pay it off and then close that loan [and] walk away.

MARCEL WASSERMAN: Yes. This is exactly true. This is again a misunderstanding out there. Obviously the banks – and they are going to hate me for saying this, I always give them a hard time – the banks need you to have the loan. That’s how they make money. So what the people do is they’ll pay the last premium in, and then they’ll withdraw it, and pay it in and then withdraw it to keep that facility open in an access bond, meaning they can take the whole amount of the bond and they can spend it whenever they like. They can literally just transfer it into their personal account.

The advantage is it’s tax free because it’s a loan, but the disadvantage is it’s a loan. I don’t want to have credit all my life. So the better point to do is pay it off. Remember, you still have the asset. So if you really, really need money, you can still go back and just refinance your property or get a loan against your property if you don’t qualify because you don’t have a salary, even then you can still [take a] loan against your property because it’s paid off. It’s an asset.

But instead, have an invest account which actually grows.

I was doing the numbers yesterday: even with Covid and with Ukraine and all these things going on, we’re still sitting at around 10% average growth for an average balanced fund.

So rather leave your money in there, get 10% extra a year instead of having to pay your 9% on your money.

SIMON BROWN: Yes. And remove that temptation to go and build a double garage or maybe take a holiday somewhere or something like that. Often people don’t close that loan down and then, as you say, they dip into it and suddenly it’s not paid off. It’s 20 years and you’re still paying money.

We’ll leave it there. Marcel Wasserman, independent financial investment advisor, I appreciate the early morning time.

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And what about the CGT when you encash that portion of your investment to pay off your bond anyway?

@LanceG: depending on the investment vehicle you used, you could have zero tax payable if you used a Tax Free Savings Account(TFSA) for example.

If you exceeded your TFSA limits, zero tax payable could also be possible if you used a life endowment vehicle.

Or using a unit trust without your TFSA allowance, CGT can be payable if you realise the whole investment after the 15 years. In the example above it would be estimated to about R22k.

End of comments.

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