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Question:
I recently inherited R1-million from my mother. The problem is I don?t know what to do with this money.

I currently have an outstanding home loan of R560 000 and owe R49 500 on my car. These are my only debts.

I am not sure whether I should use some of the inheritance towards my home loan or if I should maybe invest in property, shares or bonds.

In the meantime the inheritance is in a money market account earning 5.75 percent interest until I decide what to do.

Answer:
At first glance your question may seem to be a simple mathematical comparison with a conclusive result, but there are other considerations. For the benefit of the question, allow me to answer it for you and then challenge a few dimensions regarding what else could be out there.

Firstly, let us evaluate your current scenario for the sake of the example and based on the assumption of a R560 000 total liability on which your repayments are based. If your negotiated rate is equal to the prime overdraft rate (currently 10.5 percent), this would amount to about R5705 per month on a 20-year bond.

On the other hand, your money market account is yielding 5.75 percent per annum. Interest earned or accrued is regarded as gross income for the purposes of income tax with an annual exemption of R19 000 (under 65) and R27 500 (over 65) being applied. Assuming the worst case scenario (i.e. you are under 65 with a marginal tax rate of 40 percent), you would be liable for R15 400 in tax for the amount not exempt (57 500 ? 19 000 = 38 500 x 40 percent). This means that your net yield after tax is only 4.21 percent ? way below current inflation.

So for the 'simple' answer it is easy to see that your bond will 'yield' a greater return for your money than where it currently 'rests'.

You would then need to decide on how much to allocate towards paying off the bond and how to structure it. In other words, if the loan is not settled in its entirety one could opt for an access type facility or restructure.

If it was an access type facility, this then means that the money would be available (usually within 24 hours notice) and your repayments would remain the same. This would then result in your bond term reducing accordingly.

If you opt to restructure your bond, it would need to be re-registered at the deeds office in the same manner and cost as a new bond. This should only be a consideration if you are looking to free up some cash flow by reducing the repayments or using the saving to invest in shares or a unit trust with a mix of asset classes.

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