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Should I contribute more to my bonds or invest offshore?

Comparing the return of your portfolio to the rate you are paying would be the first step to calculate what is best.

I have two bonds, the first of R1.2 million at 6.75% is covered about 75% by rental income; and the second of R400 000 at 7.5% which is covered 100% from rental income. If I sell, I expect to get below market value of what I paid for property one and may make R100 000 on property two.

I am earning an offshore US dollar salary, have no other debt, and have an offshore bank account abroad. 

My question: is it advisable to pay as much towards both bonds monthly as I can afford to? Or do I keep the funds offshore, invest offshore and keep paying the minimum monthly bond payments due? This is taking into account the position of the rand value at present, as it may devalue further.

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Dear reader,

Thank you for your question! This is a very interesting question at this time, especially taking into account multiple rate cuts by the South African Reserve Bank in 2020 which have also made a big difference in rates for many investors.

Should our priority be to pay the bonds off first and only then invest?

No one knows exactly what the future of interest rates might hold in South Africa. However, it may remain quite low for a few years (despite some modest rises in the nearer term) given global trends. Thereafter, rates could possibly start increasing again. Knowing exactly when and by how much is, however, unknown at this point.

I would most probably consider benefitting from the low rates – depending on what your investment portfolio looks like in the current environment. Should your investment portfolio underperform the interest rate you are paying on your bonds, it is, of course, more beneficial prioritising repayment of your bonds. Comparing the return of your portfolio to the rate you are paying would be the first step to calculate what is best.

The graph below compares the following:

  • SA prime rate
  • Asisa multi-asset high equity
  • Two more aggressive portfolios (one more offshore-focused); to illustrate this I have included two indices:
    • 30% JSE/70% MSCI World for the heavier offshore allocation; and
    • 50% JSE/50% MSCI World
  • And the JSE.

If you were invested in a typical moderate portfolio (for example the Asisa multi-asset high equity index), or even just tracked the JSE, you would have underperformed the interest rate that you are paying on your bonds (working on the prime rate in this scenario).

Had your portfolio been structured with a greater allocation to local and offshore growth assets, you would have outperformed the interest rate you are paying on the bonds by far, therefore making your investment portfolio more attractive in this scenario.

Source: Morningstar Direct

Looking at your current scenario of working offshore, I have included a comparison below looking at the prime rate once again versus an offshore portfolio – one medium aggressive risk, and one higher risk (focused on equity exposure). I have included the funds in rand terms to make the returns more relatable compared to the rand-based bond rates – but essentially these will be US dollar/UK pound returns should you be invested directly offshore, which we are referring to in this scenario.

Currently, you have the benefit of already working offshore and earning your income there – this is a good hedge against the rand (and can also just be seen as a good diversification method in currency). You also have access to a very wide range of offshore vehicles. I would advise benefitting from that – but keep in mind that you need to outperform your bond repayment rates. Your funds will need to be invested and benefit from having exposure to growth assets, not just keeping it in the bank offshore, as offshore cash yields are currently close to zero.

Source: Morningstar Direct

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My biggest issue with this article is that it says “PSG Wealth”

I have only had bad experiences with them over the past number of years and their returns have been shocking while charging high fees.

Leverage both rental properties to the max. Remit the funds offshore and invest.

You can offset the rental interest losses against your earning, both PAYE and rental.

Your biggest risk is increasing interest rates. A dramatic increase in interest rates would be due to a weakening currency – we import inflation. In this case, your funds would grow purely on Rand weakness and you would only need to remit a portion of those funds back to settle the bond.

End of comments.

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