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Which of my three properties should I pay off first?

The sooner you pay off the bond on your primary residence the better.

I currently own two properties and am acquiring a third. All properties still have a balance on the bond. What I am struggling with is deciding how to proceed with paying them off: 

  • Property 1 balance: R520 000, with rental income of R5 250 per month, interest on the bond is 8%;
  • Property 2 balance: R310 000, with rental income of R4 250 per month; interest on the bond is 7%;
  • Property 3 balance: R1 100 000, interest on the bond is 8%.

Property 1 and 2 are tenanted out and the third is the one we will live in.

My options are as follows:

  1. Pay off Property 2 and use the income to offset the monthly instalment of Property 3;
  2. Pay all extra cash into Property 3 and not have an income from 1 and 2.

I’m sort of stuck between what to do …

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You are in an interesting position and pose good questions, thank you.

If I can summarise your property position as follows:

Property 1: Rental – R5,250 per month as rental income – 8% interest on the bond and R520,000 outstanding on the bond amount.

Property 2: Rental – R4,250 per month as rental income – 7% interest on bond and R310,000 outstanding on the bond amount.

Property 3: Primary residence – No income – R1,100,000 outstanding on bond at 8% interest rate.

There is a bigger conversation to have here that I think will lead you to your answer. That is tax.

A couple of points on tax on property which will help us:

Rental income from property is added to your taxable income. Depending on what tax rate you fall into, this will be the tax you pay on the rental income. Also, important to note that if you show more than R30,000 a year in rental profit (income less expenses) this may lead to you having to register for provisional tax.

On rental properties, the following are allowable expenses that can be used to deduct from your income. This essentially lowers your tax liability:

  • Electricity;
  • Rates and taxes;
  • Water;
  • Levies;
  • Agent and rental fees;
  • Accountants fees;
  • Bond interest;
  • Insurance;
  • Garden service;
  • Security; and
  • Repairs and maintenance

The most notable expense relating to this question is bond interest. You can offset the interest you are paying on the bonds linked to your rental properties. This means your profit will be less and pay less tax.

Based on this, I would recommend that you pay any spare cash into your primary residence bond (Property 3). The sooner you pay off the bond on your primary residence the better. There are no benefits in keeping a bond in place on a primary residence.

By paying more into your primary bond, you will free up some cash flow that you can use for other investments or just add to the extra into your bond every month. Your primary bond has one of the higher interest rates at 8%. Also, a good idea to settle debts with a higher interest rate.

I hope that this helps you in making your very important decision.

Do you have any questions you would like answered by registered financial planners?

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Depending on how much extra funds you have available, pay the highest interest rate first off. You can also cut all properties bond payments in half, and be half a payment “in front” of the debit orders, in this way you always are half a payment in credit, and you save on the interest at 8 or 7%, which no bank will give you for savings.
If possible, pay half of the bond payment additional to the normal debit order, you will be surprised at how quickly you pay off the bond, easily 5 to 6 years less than the original 20 years.

If you have an access bond, pull equity out of the tenanted properties to pay down your principal residences, to maximize the interest tax benefits on the 1st two properties.

If:
– you plan to take 10 -20 years to settle all mortgages
– your two rentals have increased in value since purchasing them

consider:
– refinancing the two tenanted properties
– pulling increased equity out of refinanced properties to pay down primary residence, again to maximize the tax benefit from the interest of the tenanted properties

provided the costs to refinance < the tax savings over the life of the mortgages

Great answer, to the point and perfect reasoning.

If you have an outstanding mortgage on a property, you don’t own it – the bank does. If you don’t believe me, just miss a couple of payments..

End of comments.

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