Should you invest your money or pay off your bond early?
As a homeowner you might be wondering whether it would be financially beneficial to pay off your bond early or inject your extra cash into a savings fund or investment.
Should you invest your money or pay off your bond early?
Whether it’s an inheritance, a cash prize or winning a lawsuit, many people wonder how to handle a sudden windfall. It might be tempting to make a very expensive purchase or take a vacation, and while there’s nothing wrong with spoiling oneself, it’s also important to think about how the money can benefit you in the long term. A question that many homeowners have been grappling with is whether to use a huge cash injection to pay off their bond early or to invest the money. On principle, it sounds better to get out of debt faster; who wouldn’t want the peace of mind of financial freedom after buying a house?
There are financial experts who believe that it’s more beneficial to settle your bond prematurely as you’ll free up your cash flow quicker, and use the extra money to buy what you’ve always wanted without going into debt again.
Other experts advise against paying off a home loan early. They argue that if a bond came with a lower and locked interest rate it makes more sense to invest the money elsewhere. So, if you’re paying 4% interest on the loan every month, you’re likely to get a better return in the stock market than what you would have saved by reducing your debt.
For example, if you settled your bond 14 years earlier by paying R5000 extra each month, you would have saved a substantial amount of interest. However, if you invested the R5000 for the same period it took you to pay off your bond, you end up with much more in the end, thanks to compound interest.
Another reason not to prioritise your bond is that a financial emergency can crop up anytime. A large medical expense or home repairs can take a sizeable chunk out of your savings and if most of your money went into the bond, there’s no emergency savings to fall back on.
The general consensus is to invest most of the money first (investments give you immediate access to cash should an emergency arise), then look at making extra payments on your bond. Of course, each situation is unique and homeowners should always consider the current markets and interest rates as well as their future wants and needs to determine what would benefit them most.
