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MASTER YOUR MORTGAGE OR IT WILL MASTER YOU
by Craig Lock

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Note:
The words 'mortgage' and 'bond' are interchangeable. South Africans generally use the term 'bond'; 
whereas Americans, New Zealanders, British, Canadians and Aussies (or "Ockers" as they are known)
use the word mortgage. "Japies"-the odd ones out... as usual!

Also the term Rand is the South African currency. For foreign readers substitute dollars ($)
to replace the  "arme ou randjie", which is declining by the day.

INDEX

INTRODUCTION

Chapter One: First time homebuyers

Chapter Two: What is a bond?

Chapter Three: Choosing the right housing bond for yourself

Chapter Four: Hints on how to make the most of your bond

Chapter Five: Your own home - at last!

Chapter Six: Redundancy and lump sums

Chapter Seven: Bond repayment table, reducing bond. Summary.

INTRODUCTION:

     To many (or probably most) people a housing bond is like a millstone around their neck and a sentence for
life. However your bond does not necessarily have to be that, if you use it correctly and make it work for you.
You can stay on top of your bond even if you have to go through unexpected changes in your life (such as
retrenchment). 

     My wife, Marie and I have had about eight bonds so far and we have owned various houses in three 
different countries: South Africa, Australia and New Zealand. Unstable folk! I have also been working in the
financial services industry in South Africa and overseas for approximately twenty years. I have also studied
real estate here in New Zealand and have obtained my Certificate In Real Estate. As I mentioned earlier, the
term "mortgage" is used instead of "bond" in the United Kingdom, Australia and New Zealand.

     I sometimes liken having a housing bond to driving a car with a fifth-gear or overdrive. You just cruise along
without knowing that you have it. If you know how to use your mortgage to it's fullest potential, it makes life so
much easier and effortless. You cruise along at the same speed but use far less financial power.

     No-one, most of all me, knows what unexpected changes you are going to go through in your life. It could
be transfer, marriage, remarriage, divorce, death of spouse (nice word), relocation and many others. As your
needs and circumstances change in the future, it is vitally important that you have the flexibility to adjust your
housing bond to suit you. Fortunately nowadays nearly all bonds are extremely flexible; so it is quite easy to 
find an option which best suits your particular needs. 

     For most people purchasing a house is the largest single investment they make in their lives. The average
South African (and New Zealander) changes their house approximately every seven years. For many people
their home is one of the most significant forms of saving for one's later years. Having your home fully paid off
before you retire will get you off to a great start in your retirement years. It seems like a long way ahead, but it
comes up far sooner than you think. In a rapidly changing and uncertain South Africa, it is an absolute priority
to carefully plan for one's "twilight years"...and managing your mortgage bond will help you with this.

     You can fit your bond around your lifestyle and adapt it to changes in your life. Later on we will look at how
you can do this.

PROPERTY:  The residential property cycle:

Price
upturn/boom bust/stagnation
Time

CHAPTER ONE: FIRST TIME HOMEBUYERS

     For most young people buying your first home is a stressful, daunting and nerve wracking experience. First
you've got to decide WHERE you want to buy. Then WHAT you want to buy. And when you've finally done
the rounds of real estate agents, scoured the newspapers and the city and found what you are looking for, you
get to the most daunting bit of all - the "simple matter" of FINANCE. You don't quite know what you have let
yourself into and what perils lie ahead. In addition, getting into the nuts and bolts of how a housing bond works
is a confusing experience for most first homebuyers.

     When your bank manager starts using terms like principal, interest, repayment options and the like, it is
quite likely that you will feel somewhat bewildered. Words like amortization are enough to make you shudder
and make you crawl under the manager's desk. "Save me, please help!"

     However, fortunately bonds are not so frightening and complex as what they may initially appear to be. In
this booklet I will attempt to simplify and "demystify" housing bonds. I will also show what options are available
to you and the effect of a particular option on your total interest cost and the term of the loan.

     Probably the first thing you should do if you are a young person renting, is look at the possibility of buying a
home of your own. With interest rates coming down in South Africa it might be cheaper for you to buy than to
rent. (Well, they were at astronomic levels as I recheck this manuscript - November 1998). Here in NZ they
are substantially lower. "Lucky me!" However you must have cash available for the deposit (normally 10% of
the purchase price) and be able to service the loan. 

     A property is probably the best investment you can make; instead of paying your hard-earned money to a
landlord, you will be investing in a growing asset of your own. So it is really important to ask yourself how 
much it is going to cost to get into a home of your own. In other words, what will be the monthly repayments 
on my bond. (I will show how you can do a simple approximate calculation or use the table). Property is one
of the safest investments around and house prices nearly always appreciate over a period of time. They are
down at the moment here in "Godzone" (as New Zealand is affectionately known), but no doubt the slump in
the NZ property market will be over soon.

Choosing a financial Institution (lender):
     Now you have decided to buy; because you have the deposit and it makes financial sense. Very few buyers
can afford to pay cash for the house; so the next step is arranging finance from an institution, like a bank or
building society.

     Obtaining finance these days is far easier than in times past. There is tremendous competition in the market
to lend money to you, the customer. With so many financial institutions advancing housing finance, the public
has a great choice and opportunity to get a good deal. You can afford to shop around; you don't have to get the
bond from your bank or building society.

     There is always a slight difference in interest rates charged by the lending institutions and these rates are
determined by the market according to supply and demand. When money for lending is tight and demand great,
interest rates go up. Conversely, at times when money is readily available and demand low, interest rates 
reduce. The interest rates charged by the banks and building societies are constantly changing, so what you
might save now, could be lost shortly when another institution undercuts yours. My advice is to deal with a
reputable long-established bank or building society, or the one which has treated you well and provided good
service in the past.

     You can save money by getting the right finance package, which is tailor-made to suit your particular
circumstances. The options are not as confusing as you might think.

     So go to the lender well prepared. Know what you want, so that you can discuss with the bank official 
what bond is most suitable for you. In the next section I cover different types of bonds. It is probably worth
the buyer's time to take as much care in planning the best finance package, as is spent investigating properties
that interest you. This time is never wasted.

     Some banks offer Guaranteed Certificates of Finance or Pre-approved Bond Certificates, as they are
sometimes called. You can get these before you even start house hunting. The idea is to put you in a stronger
bargaining position when you put in an offer on a property. You know that your finance is guaranteed, so your 
offer does not have to be conditional on arranging finance. There is sometimes a small fee payable for this
facility; but it is well worth the money. Some institutions may even waive the fee for you (have cheek, like me
and ASK!).

     One of the benefits of having the finances sorted out in advance, is that the buyer is then in a position to be
able to take an active interest in auction sales, where a bid is binding when the auctioneer closes.

     In order to make the best deal with a lending institution, the first step is to have on paper a full summary of
your assets and their value. List your liabilities too. You should also bring along some evidence of your income
and the amount that you hope to borrow. Each financial institution has its own criteria on how much it will lend.
The organization takes into account the borrower's assets and his or her level of income (as well as your track
record, if you are a client of the bank). So know your income and outgoings.

     The lender will then be in a position to advise whether the buyer qualifies for a loan. If so, it will also advise
the maximum amount that may be borrowed. Most institutions will lend in the region of 70-80 per cent of the
amount of the registered valuation. Your monthly repayments also should not be more than about a third of
your combined salaries; but this figure varies from institution to institution.

     Having this information in advance will save you, the buyer a lot of time and frustration in inspecting
properties that are outside your price range. Most people do the opposite. They go looking first, then see if
they can arrange the finance.

     The financial institution lending the money will always want to have a valuation of the property by a 
registered valuer before making a final decision.

CHAPTER TWO: WHAT IS A BOND?

     By now most people will know what a bond is (if I've done my job properly in Chapter One). It is a housing
loan in which you borrow money from a financial institution. In return for the debt, you agree to repay the 
money at regular intervals over a set period of time. The borrower pays off a regular fixed amount of the loan
(or principle as it is known by those "finance types"), plus interest right from the start. In the early years of the
bond most of your repayment monies are going towards interest. The longer you keep paying, the more your
payments eat into the interest; so that towards the end of the bond, most of the payment is going towards
reducing the principal. It is at this point that the loan starts coming down very quickly (see diagram, as well as
the Appendix at the end).

     There are so many different types of bonds in today's competitive market. The most common type of
housing loan on the market is what is sometimes called a "floating" bond or just an ordinary bond. The amount
to be repaid varies according to the interest rate at the time. The interest rate can change according to market
conditions, so your repayments can go either up or down. These loans are for a specified time with a maximum
of 30 years or age 65, if earlier. Twenty or twenty-five years are the most common. The bond term can be
reduced later, which will push up your repayment level.

     For those who prefer to know how much they will have going out in repayments, some lenders offer a fixed
rate bond for the first twelve or eighteen months. This is normally a "special", slightly below market rates.
Because floating rates can move while the fixed rates don't, a borrower on a fixed rate is guaranteed against 
any increases in the short term, like the first year. If interest rates drop below the fixed rate, you lose; if they
increase, you win. Whatever you do you take a chance - it all depends on how you see interest rates going.
Even the experts continually get things wrong; so don't try to predict the market. Just BE PREPARED FOR
CHANGE.

     Because the terms and conditions vary between lending institutions, one organization offering a loan at say
"X" per cent may have a slightly different repayment rate from another bank or building society, which is
advertising the same interest rate. Find out when the interest is debited to the account. Is it monthly? It helps if
you can reduce the bond before the interest is calculated by the bank.

     For this reason it pays to visit more than one lending institution before making a commitment to borrow. Ask
about the management fee and whether you can repay the loan earlier than agreed without being penalized.
Most lending institutions allow for early repayment of mortgages. However, it pays to check before making
payments, as some banks/building societies may require notice to be given to avoid an early repayment penalty.

     Also ask whether you can pay in lump sums to reduce your bond and whether you can increase the bond
if you buy another property (assuming you have high equity and can afford the repayments). Can the bond be
transferred if you later move to another property? Some lending institutions offer flexible bonds, which allow
you to borrow at a subsequent date the amount of the original loan obtained. These are very advantageous, as
you will not be penalized for reducing your bond. You also save by not having to register a brand new bond at
that time. Above all, find how much are the repayments.

     Choose a term and repayment option that suits you best - for example, monthly or fortnightly repayments.
If possible, fortnightly is better. I cover the reason for this later. The longer the term you can negotiate, the
lower will be the rate of your regular repayments. However most importantly, remember that the longer the
term of the loan, the more you will be paying out in interest. In the early years of a bond most of your payments
go towards paying interest rather than principal. Principal is the amount of capital (money) originally borrowed
and excludes the interest component.

     Above all, keep in mind that the cost of borrowing to own a home of your own is relatively low. It is much
cheaper than other forms of borrowing, such as hire purchase, credit cards and bank overdrafts.

CHAPTER THREE: CHOOSING THE RIGHT HOUSING BOND FOR YOU

     Which is the best type of home loan for you?

     You - the customer - are in control. You with advice from the financial institution can decide HOW you
want your bond to be structured. There are usually a variety of options available to you.

     Which one is the best for you depends on your ability to service the loan and whether you wish to pay it off
quickly and save interest costs, or spread repayments over a longer period and so take advantage of smaller
monthly or fortnightly repayments.

     Put in a nutshell, the features of a shorter term loan are larger regular repayments and reduced total cost;
as opposed to a longer term bond, which has smaller regular payments and a larger total cost over the term.

TYPES OF LOANS:

Some of the common available loans are:

1. Reducing Loan:
    
Here you pay off a regular fixed amount of the principal loan, plus interest right from the start. As a result, 
the principal reduces faster and the interest payments get smaller. This means that the total amount you owe
decreases every payment. Your interest payment decreases too; so that as time goes by your repayments get
smaller and smaller, which makes it very easy to service.

     This is the option for you, if you can afford higher repayments and want reduced overall costs. If you are
fortunate enough to be in this position, this is the option I would recommend.

2. Standard or "Floating" Bond:

     This means you pay the same amount every month or fortnight, calculated to pay off the loan plus interest
over a set period of time. Initially you are paying off interest plus a small amount of principal. Your repayments
are smaller at the outset than a reducing loan, so you can afford to borrow more. Fixed payments mean
budgeting is easier, however at the expiry of the term you will have paid more for the use of your money. The
interest rate may go up or down depending on market conditions. As already mentioned, you may be able to
choose a fixed interest rate for the first 12 months. 

3. Flexible Bonds:

     These are very useful. They are a unique account being a bond, overdraft, savings account and cheque
facility, all wrapped in one. Options one and two can usually also be flexible bonds.

     By consolidating their financial accounts into one facility, the customer gets direct access to a credit line,
which offers up to about 75% of the market value of their home.

You can:
* increase, decrease or sometimes suspend monthly repayments to suit needs and changing circumstances.
* make lump sum payments and re-borrow at a later date, or extend the repayment term without penalty.
* repay the total loan at any time without penalty.

     Flexible bonds allow you to adjust your lending to suit changes in your personal life. You can also use the
flexibility to repay more expensive debt (e.g.. credit cards).

4. Interest Only Bond:

     This can be suitable for those people on very tight budgets, because it offers the minimum monthly
repayments. At first you pay interest only on the amount you have borrowed; so you are not paying off capital.
After a period of time you start paying the loan (principal) itself, as well as the interest. Your initial payments
start off much lower than the other options; but in the end you pay far more for the use of the money that you
have borrowed. I do NOT recommend this option, which is not very common (although it can help people on
very tight budgets).

5. Reverse Annuity Bonds:

     These are popular overseas and are designed for older people who are asset-rich but cash-poor. Nice
sounding 'fancy' words, don't you think? The financial institution has the security and in effect commutes the
person's annuity or pension for a lump sum.

SUMMARY:

     Most people are committed to the hilt when they first take out a housing bond, but as time goes by changing
personal circumstances often ensure that they can afford a higher level of repayments. As a result it is absolutely
essential that your bond is FLEXIBLE (see 4 above). My recommendations are options one and two, as long
as they incorporate the flexibility. So ask the lending institution about this.

     If your payments are set too low, you might find out that you owe more than the original bond. With my
first home I was very surprised after a year or so, when I got a statement from the bank. My bond had
increased because I was not paying off any principal!

CHAPTER FOUR: HINTS ON HOW TO MAKE THE MOST OF YOUR BOND

     No-one can foretell the future, but in choosing a bond try to think of the future in your unfolding life. For
example, a newly-wed couple could run trial scenarios through their heads. Oh no! This could include the
financial impact of the arrival of a first child in, say, three years time. It could also be the possibility of increasing
payments following a salary rise, or your partner returning to the workforce after a period of study.

     Remember that you, the customer, are in control. The financial institution is making a profit on lending out 
money to you; so use your own money first if you have it. It does not make good economic sense to have your
money invested on fixed deposit at say 12 per cent, which is equivalent to 8.4% net after tax (assuming 30%
tax). After all, even though bond rates are coming down, a bond rate of 16% will mean that you are earning a
negative 7.6% on your money(16-8.4%).

     However, always keep some of your savings available in the event of an emergency. Most importantly,
ensure that you can afford the repayments. Don't go in over your head, because a property is not the "be-all 
and end-all" in your life. You will not be happy, if you are constantly worrying about how you are going to 
make ends meet.

     Your repayments should not cripple your household budget and make your life a struggle. The key is to
have BALANCE in your life, so that you do not spend nearly all your small salary paying off a mansion. "Cut
your cloth according to your means."

     We have seen that you, the customer, have a great deal of choice in structuring your bond to fit your
particular circumstances. You can have one virtually "tailor-made" for you. So look carefully at what suits you
best in the long run. The most important thing is FLEXIBILITY. Fortunately, most housing bonds are extremely
flexible. For example, you may wish to upgrade your home at a later date. A tailored home loan can save you
thousands of rand (dollars) in the long term.

     Although a drop in interest rates is good news for homeowners, interest rates are only one part of the home
finance equation. Falling interest rates will help household budgets, but the benefits can be smaller compared to
the savings that are possible from a good and clever bond structure.

Flexibility: (see option 4 in previous chapter)

     I would advise that the most important principle is to pay off principal, pal. Please excuse my play on words
and "funny" sense of humour. Pay off your bond as soon as possible. ALWAYS. If you can afford it, increasing
your repayments will allow you to pre-pay your bond far quicker and possibly save you thousands of rands in
interest payments. You have the chance to be bond-free far faster.

     Repayment levels can be changed to meet lifestyle changes, such as the impact on household income of the
arrival of children, redundancy, or a decision by a spouse (I like that word - reminds me of a "spastic mouse")
to take time off to study. Now that would be a real wish or perhaps pipedream these days...

     You are also increasing the equity in your home if you can pay off your bond more quickly than the standard
20 or 25 year term usually offered by the financial institution. With the lower bond interest rates now prevalent
in South Africa (and most countries), the opportunity exists to pay off your bond sooner by keeping your
repayments at the previous higher levels. Instead of having your payments reduced, by maintaining the same
payment you will be saving yourself money. In times of low interest rates, it may even be possible for you to
increase your bond payments.

     Considerable interest savings can be made by making your bond repayments (interest + principal) fortnightly
or four-weekly, rather than monthly or quarterly - even though you might be paid monthly. Most lending
institutions allow the borrower to have this facility. Your payment is half the monthly one and it is a relatively
painless method of paying off your bond sooner than normal. It works like this: You are actually paying the
equivalent of an additional month's repayment per year (with 26 fortnightly payments in a year).

     Look at the difference these options are going to make to your personal situation, i.e.. what will they do for
you? Ask your friendly bank officer what is best.

     For the majority of us, no matter where we may live, our home and the equity it represents is the most
significant form of savings that we will build up during our working lives. So it is very important to look
carefully at all the options in financing your home when we make that momentous decision to buy. 

CHAPTER FIVE: YOUR OWN HOME

     Now you are happy in your own home with the bills all paid and you are managing comfortably. Some time
later you might wish to take a further step and build up additional equity in your home. This is a wonderful asset
and could be a brilliant stepping-stone as an investment for the future. My wife Marie and I have followed this
principle and done this on a number of occasions.

     Many people use the strategy of purchasing a second property as an investment. This can help build up an
additional nest egg to the equity they already hold in their home.

     The financial institutions are normally quite happy to lend, as they have the security over your original
property. You can use the equity in your home as a deposit on a second property.

     The rental income will be used to pay off the bond and because property prices have traditionally increased
substantially over time, there should be some nice capital appreciation for you.

     However, it is very important that you have the means to afford two properties and the right attitude to risk.
Property is one of the safest investments around; but it does not always have to go up at any given time.
However, if you have the right attitude that as soon as you have good equity in your home (say 50%), you can
select another investment property. These people will be well on the way to building up a property portfolio of
their own, a substantial asset. In time, say 10 or 15 years, this could serve as an excellent pension
(superannuation or retirement) plan to look after you in your retirement years. It can even keep up with and
sometimes beat the eroding effects of the inflation monster.

     Even with a low capital appreciation of 3 or 4 per cent per year, it is amazing how quickly the increasing
value  of a property, coupled with the reduction in your bond, builds up your personal equity and provides
security for the future.

     Rental income from property can provide a very good income. It is normally taxable, but you can claim
deductions. Rental income is an income stream, which is protected against fluctuating interest rates from bank
deposits and other investments.

     Some people ask me if they should take out a life assurance policy or savings plan, or rather increase their
bond repayments. My advice is that if the after-tax return on the policy is less than the bond interest rate, then
you are best increasing your repayments. However, many savings plans are market related. You do not know
the earning rate; because it depends on the companies' investment performance, so it is difficult to give a 
definite answer in these cases.

     Also everybody's circumstances are different.

     I have suggested you try and pay off your bond as early as possible. There is probably one scenario when I
would not advocate this. If inflation is persistently higher than your bond interest rate - a not very likely situation!

CHAPTER SIX: REDUNDANCY AND LUMP SUMS

     REDUNDANCY: In today's uncertain world no-one can know what unexpected circumstances are going 
to befall them at some time in the future. The only certainty is that there will be change. In these tough economic
times retrenchment and redundancy are affecting more and more employees. It affects the full range of people -
right from blue-collar workers to middle and senior management. I have recently been in a similar position,
which has given me the time and opportunity to write this manuscript.

     Redundancy can be quite stressful; however it does not necessarily have to trigger a financial crisis with your
household budget. Financial institutions are normally quite accommodating if you lose your job. You can
normally arrange to decrease your payments or perhaps even temporarily suspend them for a few months in a
severe cash flow crisis. They try to help as much as they can and can be quite understanding. It's in their interest.
Well they don't want to risk foreclosure on the mortgage bond!

     If you have to go down to one income, you will normally receive a redundancy payout in the form of a lump
sum. Most financial advisors suggest that you immediately deposit this sum in your bond and I agree with them.
If you do not need the money for some dire emergency, this is nearly always the most efficient course of action
that you can take. Your money will then be working for you, by reducing your bond in the most tax-efficient 
way possible.

     I would suggest the same advice, if you inherited a sum of money or won a lottery. No doubt you would
have a horde of financial advisors after you telling you that they have the best scheme available in which to 
invest your money (and receive their commission). However, you can't do better for yourself than invest in your
own bond and BUILD EQUITY.

     Let's look at an example: Take a borrower owing R100000 to a building society at an interest rate of 15 per
cent per annum. The actual interest is approximately R15000, which is a direct expense with no tax deductibility.

     If that person had R20000 on fixed deposit earning 10 per cent at a bank and was paying income tax at a
rate of say 30 cents in the Rand, they would be effectively gaining 7% net per year on their savings - R1400; 
yet they would still be paying 15 per cent on their bond, approximately R15000 per year. By paying the deposit
of R20000 into the bond, the bond repayments would reduce to R12300 per year. Although they would lose
the interest on the fixed deposit, they would still have more money in their pocket - about R1600 per year or
R130 per month.

     INSURANCE: It is vitally important that you have adequate and full insurance cover. Your home is singly
the most important asset you will probably own in your lifetime; so make sure that you have it covered. There
are three main types of insurance:

     1. House bond assurance: This is life assurance, which ensures that should you die before the bond is
fully paid off, money will be available for full repayment of the outstanding loan to the financial institution. Your
spouse will then be able to remain in the house, which is fully paid off. The type of life assurance is very
inexpensive and the cover reduces over time in line with your bond; so that the cover eventually expires
completely. This form of term assurance has no collateral value, consequently you receive nothing at the end.

     You have the option of adding disability cover. This means that if you are totally and permanently disabled
(virtually "cabbage material" according to the definition of disablement you will be paid out the amount insured, 
as if you had died. This pushes up the cost.

     If the couple both work, you can take out joint insurance. If either one of you dies (or gets disabled), the 
Sum Assured is paid. If death is simultaneous, the sum is paid out for each life.

     So HAVE INSURANCE for peace of mind.

2. General Insurance (also known as house-owners insurance):

     This covers full replacement of the house in the event of a natural disaster, like flood, fire, earthquake, etc.
It also covers damage to the building. It is important to be insured for the full market value of the policy. If you
are under-insured, the insurance company will view you as being partly your own insurer in the event of a 
partial loss. They will apply the principle of "average" and only pay out a proportion of the claim. "Averaging"
is one of the most misunderstood concepts of insurance.

3. Contents or householders insurance: 

     This covers the normal chattels (like 'dat' word 'chattels') in the house, like carpets, curtains, as well as
additional cover for personal effects normally carried on the person, like watches and jewelry in the event of
unforeseen loss or damage. Sometimes there is a bit of doubt whether damage to a carpet is covered under
house-owners or householders insurance. If it is a fixture, it is part of the house, i.e.. covered under
householders insurance policy. Be careful to be adequately insured, because the principle of "average" also
applies here.

     Income replacement insurance: This pays out a monthly income to help with bond repayments should you
be temporarily or permanently off work due to accident or sickness. Find out from your employer how long 
they would pay you for. It pays slightly less than your salary and you can choose different waiting periods
before payments start: the longer the wait, the cheaper your payments. I very strongly recommend this cover, 
if you are self-employed or on commission (because you'd really be "in the s-t and up the creek with no
paddle", sorry pay)...and premiums are tax-deductible.

CHAPTER SEVEN: BOND REPAYMENT TABLE

     I was never much good at math at school; but here is an easy way of working out approximate monthly
payments on a housing bond. You do not need those wonderful gadgets like financial calculators, but an
ordinary calculator is useful.

     Let's say you want to borrow R150000 at 16 per cent interest. The calculation is as follows:

16
150000 _____ = 24000
X
100

     To convert the R24000 per year payment to monthly, simply divide by 12 = R2000 per month. Quite steep!

Note: This calculation is an indication only and does not take into account the term of the loan
(normally 20 or 25 years). Bond tables will give you the exact repayment.

SUMMARY:

     A few final words to end off...

     If you have the right attitude and feel in control of your bond, you can make it work for you. You don't have
to view your payments as a crippling burden on the household budget, or as just another bill like the butcher or
grocer (or candle-stick maker!). Like those you are getting something in exchange. You are saving for the future
- in an excellent investment, as well as providing you with board and lodging. So look at it as a monthly savings
scheme: one in which you pay yourself first. However it's big disadvantage is that it is not designed as a
short-term investment. So if you want to save for an overseas trip in a few months or years, you won't make
much of a gain using your bond.

     A mortgage bond can even give us a feeling of permanence and stability - security and peace of mind. In a
highly inflationary environment, like South Africa, property is an excellent investment. Andrew Carnegie, the
American business tycoon said: "of all millionaires, 90 per cent became so through owning real estate and a wise
young person or wage earner should invest in it." Your bond will help you do this and does not necessarily have
to master you.

ADDITIONAL NOTE

     As part of my real estate study for my certificate, I have also written a short booklet titled 
"15 Steps to Your Front Door", which is a guide before buying for new home-owners.
Please Contact Me if you are interested in a copy. 

******************************************

APPENDIX ONE:

     Let us look at how a typical bond works. The example is a R100000 bond with a term of twenty years at
an interest rate of 15 per cent. The schedule of payments would look like this (assuming annual payments and
rounding off to the nearest rand). The exact payment is R15976.15 per year or R1331.35 per month:

Year

  Interest

Principal

Balance Remaining

1 15000  976 99024
2 14853 1123 97901
3 14685 1291 96610
4 14492 1485 95125
5 14269 1707 93418
6 14012 1963 91455
7 13718 2258 89197
8 13380 2597 86600
9 12990 2986 83615
10 12542 3433 80181
11 12027 3949 76232
12 11434 4541 71690
13 10754 5223 66467
14 9970 6006 60461
15 9069 6907 53544
16 8033 7943 45612
17 6842 9134 36477
18 5472 10505 25972
19 3896 12080 13892
20 2084 13892 00000

     TOTAL R219522

     TOTAL REPAYMENTS = R15976 X 20yrs = R319520

     Remember that your payments in 20 years time will not have the same value as today. R15976 per year
(or R1331 per month) at 15% inflation will have the same buying power as R976.14 in today's buying power...
but guess what your annual salary will be?

R261472!!!

     As can be seen, the first installments include a much larger proportion of interest than principal. The interest
payments reduce throughout the term of the loan and the interest is paid well in advance. By the end of the term
the total interest paid is more than double the amount originally borrowed.

     These interest costs can be significantly reduced by increasing repayments. In this example the bond could
be paid off in just 15 years, if repayments were increased to R17102 per year.

     (= R1425 per month). You would save a huge amount in interest. Pay R19925 (R1660 p.m) and your
bond will be paid off in ten years. In summary, the greater the repayment, the shorter the term of the loan and
the less paid in interest charges.

APPENDIX II

     TABLE 3: COSTS OF BOND at 12% p.a. over 25 years

     PAYMENTS (multiple of);

SUM BORROWED MONTHLY ANNUALLY TOTAL PRINCIPAL

 R30000

254.40

3053

76320

2.5

R50000

467.00

5604

140100

2.8

R75000

732.75

8793

219825

2.9

R100000

998.5

11982

299550

 3.0

Copyright   Craig Lock
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