A home generally appreciates in value over the years but a car will depreciate. As the vehicle becomes less valuable, or even no longer in working order, the user may be less inclined to keep up their payments to the bank. If an individual defaults on the loan, then there is little chance of the bank being able to sell the vehicle for enough money to cover the costs. However, if someone defaults on their home bond there is usually enough equity to pay the outstanding balance to the bank. Greg Sneddon, a financial advisor and MD of The Financial Coach gave the following account of his own experience.

The first house that I bought cost R85 000 in 1990 and was financed over a 20-year period. A few years later I also bought a new car for R80 000 which was financed over five years. It puzzled me that two items of similar value could be financed over such different periods.

At that stage I knew little about money and the cost of interest. Perhaps if I had thought more about it I would have realised that I had just become another victim of the great debt trap that has so many South Africans in its clutches. What I did not figure out was that because of the interest paid, the R80 000 car actually cost me ±R114 000 while the R85 000 house cost me ±R268 000 (more than three times the actual purchase price).

It is a well-established fact that when it comes to investing, it usually makes excellent sense to first get rid of your debt before plunging money into another investment vehicle such as an endowment (education policy) or unit trust. In this context it makes good financial sense to get rid of the most costly debt first — things such as the budget facility on a credit card, personal loans and overdraft are common examples. Much has been written about the effects of paying extra into your bond. The table below shows the effects of increasing the monthly repayment on a "typical" home loan over a 20-year period.

Effects of increasing bond repayments on a R300 000 home loan (interest at 13.5 percent):

Repayment	Difference	% Increase	Term (years)	Total interest	Total Cost
±R3622	0	0	20	R569 000	R869 000
±R3984	R362	±10 percent	14	R369 000	R669 000
±R4149	R543	±15 percent	12.5	R322 000	R622 000
±R4568	R946	±25 percent	10	R248 000	R548 000
±R4817	R1195	±33 percent	9	R219 800	R519 800

From the table it can be seen that just by increasing your monthly bond repayment by an extra ten percent per month you will reduce the term by six years, and will pay a lot less interest. Your R300 000 house will then cost you ±R670 000, as opposed to almost R870 000 if you had not increased the repayment. You would have had to get an annualised return in excess of 15 percent (that is 15 percent every single year for 14 years!) on the R362 in another investment just to achieve the same effect. A 15 percent increase in the monthly repayment will decrease the term by 7.5 years.

Many people I know will quickly tell me that they can't afford to increase the repayment on their bond — there are so many other expenses to be paid, rates, electricity... Stop right there! We've been misled for far too long. Money going into education policies while you are busy paying off debt, such as your bond, makes very little financial sense. From a behavioural finance point of view this is called compartmentalisation. Far too many people have huge bonds, and other debt, and yet are saving into other things such as education policies and unit trusts. In very few circumstances it makes sense for people to invest into other vehicles, but for the vast majority their first priority should be to settle their debts. So, if you have debt such as bond, you should really consider paying it off before you invest into something else.

It is also fortuitous that the Monetary Policy Committee of the Reserve Bank has just announced another one percent cut in interest rates. Here is your opportunity! By leaving your current repayment as it is you will effectively save yourself four years on your bond (the one percent rate cut is equivalent to almost six percent extra on the monthly premium). Your bond is an investment/savings vehicle!

Many home loan facilities provide people with quick and easy access to extra funds (access facilities), and as such they can be used to save for short-term emergency expenses as well. Just be sure to pay back any money that is drawn as soon as you can so that you don’t finance it over a 20-year period.

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