Your Pfandbrief: Friend or Foe?

One of the most important decisions you can make in your search for financial security is whether to pay off your mortgage sooner or later. This can either be complete when you’ve won big business or received a great bonus, or by increasing your monthly repayments to make it cash out faster. The decision can be complex and affect the return on your investment, the interest rate on the mortgage, inflation, and most importantly, human emotions. Before you call your bank manager with a decision, you need to weigh the pros and cons.

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Advantages of a Pfandbrief
Owning a home – and keeping your monthly mortgage payments going – is a sign of stability. If you need a loan for any other reason, e.g. For example, if you are buying a car or investing in a business, lenders will likely first check that you own a home and that the payments on your bond are up to date. It shows that you can manage loans and are unlikely to default on your payments.

Then there is the human factor. If you are naturally spending a lot of money and are more likely to buy a new golf club or fly overseas than to divert what you would have paid for your mortgage into investments like a retirement pension or mutual fund, there is a clear benefit to a mortgage. It is a forced saving.

A great advantage is that with a mortgage you can benefit from the lowest interest rate based on the value of your home’s security. It’s cheap debt, and the part of it that you’ve paid off can be used, for example, to renovate your home.

Disadvantages of a mortgage
There’s no point in being rich and cashless. Life can become very stressful when the budget is tight and you are faced with unexpected and significant expenses. Ongoing mortgage payments can prevent you from setting up a crucial cash fund for the inevitable emergencies.

Then there are the so-called opportunity costs, which are the costs of missed opportunities in other investments. When you pay off a mortgage, you run the risk of losing any potential profits that you might earn by investing elsewhere and the return on which is higher than the interest rate on your mortgage. However, you need to consider the after-tax return on the investment and the risk involved: the opportunity cost is not guaranteed in volatile markets.

The good old diversification policy also applies. If you are home rich, have low cash, and don’t invest in other asset classes like stocks, you carry significant risk in your investment portfolio because it is overweight in real estate. This risk increases the closer you get to retirement.

The most important reason for paying off your mortgage is to save interest. If you borrow R3 million at nine percent interest and pay it off over 25 years, your monthly payments will be R 25,176. The interest cost included in those payments over 25 years is a staggering amount of over R 4.5 million .

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And finally, your mortgage could cost you the peace of mind that you may experience when you are debt free.

Like life, personal finance planning involves a number of compromises so there may not be the right answer for everyone. The decision should take into account all of your personal variables, including your total assets and liabilities, your risk profile, your family circumstances and your age. Before making this important decision, discuss your circumstances and priorities with your financial advisor.

Linda Graham, who is accredited as a Certified Financial Planner, is the founder of FinCommunication, a marketing consultancy for financial services.


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