James Bond has turned into an international icon for his bravery, quick wits, and dangerous actions. While every man wants to be James Bond in one way or another, it's important to not share the same approach when dealing with bonds, although they take after the same name.
The problem begins with the costs associated with buying property and the high risk nature of a home loan or bond. Owning property is considered a future investment, not a quick way to make money.
The actual costs of taking out a bond in relation to the total costs involved in the act of buying a property are not that high.
Registration, initiation, and conveyance fees serve as bond charges you can expect to pay. They join value added tax as the principal bond fees.
However these fees, which are predicted to reach around 3% of the total property cost, are recovered within a year or two assuming your property appreciates.
However you do not get out of the red within a year. In fact, the first third of your bond is mostly dedicated to paying off interest and not principal. So while you think the payments are going to the principal, they are actually eating away at the interest. This becomes another dilemma when you go to sell.
For example, buy property at $600,000 and sell back within five years. If you've only paid $30,000 in principal, which is a likely scenario, you still owe $570,000. Can you cover that?
The bank also must find ways to cover a large bond. Often they borrow from a central bank. If the small, more local bank hits a rough patch, it will request some relief from the central bank. The central bank may allow the bank to enter a "grace" period with the bond, which means they will pay principal and no interest for a pre-defined amount of time. This does not come without penalties though.
Costs associated with a bond are relatively low as long as the borrower takes a long term view of property ownership and is able to meet the commitments throughout the duration of the bond.
The problem begins with the costs associated with buying property and the high risk nature of a home loan or bond. Owning property is considered a future investment, not a quick way to make money.
The actual costs of taking out a bond in relation to the total costs involved in the act of buying a property are not that high.
Registration, initiation, and conveyance fees serve as bond charges you can expect to pay. They join value added tax as the principal bond fees.
However these fees, which are predicted to reach around 3% of the total property cost, are recovered within a year or two assuming your property appreciates.
However you do not get out of the red within a year. In fact, the first third of your bond is mostly dedicated to paying off interest and not principal. So while you think the payments are going to the principal, they are actually eating away at the interest. This becomes another dilemma when you go to sell.
For example, buy property at $600,000 and sell back within five years. If you've only paid $30,000 in principal, which is a likely scenario, you still owe $570,000. Can you cover that?
The bank also must find ways to cover a large bond. Often they borrow from a central bank. If the small, more local bank hits a rough patch, it will request some relief from the central bank. The central bank may allow the bank to enter a "grace" period with the bond, which means they will pay principal and no interest for a pre-defined amount of time. This does not come without penalties though.
Costs associated with a bond are relatively low as long as the borrower takes a long term view of property ownership and is able to meet the commitments throughout the duration of the bond.
About the Author:
Graham McKenzie is the content syndication manager at BondCredit.co.za South Africans leading Bond Originator
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