Paid off your bond? Now put that bond account to use
Most of us can't afford to haul out cash for our homes — we have to rely on home loans that can cost us up to 30% of our monthly income in repayments. It's no wonder that we're eager to be bond-free as soon as we can. But closing that bond account when you're all paid up might not be the best idea.
For a start, there's more than a strong chance that you'll need to borrow money sometime in the near future to finance your child's tertiary education, buy a car, or even another property for the kids to move into while they study.
Borrowing against the equity you have in your home — by extending an existing mortgage — will definitely be the cheapest way to do this. That's reason enough to keep your home loan account open, even if it's paid up and you have to pay a nominal monthly fee to keep it active.
On top of this, the longer you stay in your home, the greater the danger of becoming 'house rich and cash poor' — you owe very little on your home but you're short of cash for the upkeep or improvement of your property. The good news is that, as the value of your home increases over time, it will create additional equity that you can access in order to upgrade and renovate your space — but that can only happen if your home loan account is still open.
Of course, if you've been racing to pay off your bond by putting additional money into your bond account every month, you're doing the right thing. In fact, it's a damn fine tax-free investment — because you're eliminating both debt and an expense that's not tax-deductible.
Some buyers still believe they could do better by investing in shares instead of putting extra cash into their bond account. But they need to realise that the stock market is generally much more volatile and risky than the real estate market, and dividend tax currently sits at 20%. You also shouldn't forget the interest savings you make as you reduce the balance of your bond.
So, while there's reason enough to bring down that bond debt as quickly as you can, there's even more reason to keep that account open to fund future investments.