[ADVISOR VIEW] GarethCollier of crueinvest explores the longer-term effects of a 20-year bond versus a 30-year bond in relation to one’s retirement funding, with the objective being to target the greater net asset value. PersonalFinance
With interest rate increases coming into effect both locally and abroad, many homeowners are focused on paying off their bonds as quickly as possible to save interest over the long term. While this is commonly accepted as being good advice in that it results in interest savings, it is also important to factor in the lost opportunity costs of making higher bond repayments.
In this example, we have assumed that John earns a gross monthly income of R65 000. He purchases a property for an amount of R3 million and makes a 10% deposit on the property. He applies to his bank for a bond of R2.7 million and is offered an interest rate of prime, which is currently 8.25%, with the option to pay off the bond over either 20 years or 30 years.
If we assume over the 30-year period, John’s retirement fund contributions once again generate a net investment return of 9% per annum, he will have a net investment value of R8 163 285 at the end of this period. Although John has paid more in interest over the 30-year period, by reinvesting the difference in a tax-efficient manner, he has created more long-term value in his balance sheet over 30 years.