Bond, Bankrupt Bond: The costs associated with bonds
Buying property is always a questionable decision. For starters, land is becoming harder and harder to purchase. There are also the questions of "what will you do with it?" and "do I really need it?" Buying property can come in the form of a bond, which will finance the property for the long-term.
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 high.
Several fees are associated with bonds, which include registration, initiation, and conveyance fees. Value added tax also comes into the picture. Add up all these charges and you begin in some debt.
The fees must be paid, but they should never exceed 3% of the total cost of the property. In return, the property should appreciate, and recover the lost in a year or two.
However many people do not consider the minor details and purchase property on instinct. If they sell back within five years they lose a lot of money because you spend the first third of the bond paying back interest and not principal. The result is a lot of money still due.
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.
If you are thinking about purchasing property make sure you think about it thoroughly. This should never be a spur of the moment type of purchase. Bonds are great for the long-run, but horrible for short investments.
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 high.
Several fees are associated with bonds, which include registration, initiation, and conveyance fees. Value added tax also comes into the picture. Add up all these charges and you begin in some debt.
The fees must be paid, but they should never exceed 3% of the total cost of the property. In return, the property should appreciate, and recover the lost in a year or two.
However many people do not consider the minor details and purchase property on instinct. If they sell back within five years they lose a lot of money because you spend the first third of the bond paying back interest and not principal. The result is a lot of money still due.
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.
If you are thinking about purchasing property make sure you think about it thoroughly. This should never be a spur of the moment type of purchase. Bonds are great for the long-run, but horrible for short investments.
About the Author:
Graham McKenzie is the content syndication manager at BondCredit.co.za South Africans leading Bond Originator
posted by Credit Counseling at
6:52 AM
0 Comments:
Post a Comment
Subscribe to Post Comments [Atom]
<< Home