It starts and ends with the bank

The bank will never place itself in a position where the loan favours the lender more than the borrower. Why would it?

So, when lending you the money they will ensure that you securitise it with the property you are buying. They consider the loan relative to their valuation of the property which is normally 80%. Recently, however, they have stretched this in certain circumstances to 100%, in which case, no deposit is required. In rare cases, they offer 105% to some elite clients which covers the transfer costs as well.

Understand their game

They are in the lending business making money out of the interest they charge over the duration of the bond. So, if they lend you R2 million at an interest rate of 9,75% (prime lending rate) over 20 years (duration of a bond) then they make a cool R2 552 881 out of the deal. 

Time value of money

It can be argued that the R18 970 per month is discounted by inflation into the future. So effectively the loan repayment will be worth less and less over the 20 years as a result of the time value of money. Assuming the value halves every 10 years, your repayments in 20 years’ time will effectively be around R5000 in today’s value. 

Always remember, that the bank owns your house and its appreciating value all along the way until the bond is paid up. In the first 10 years, your instalments pay more to interest than the debt leaving you around 90% of the bond still to pay. At this stage, the house could increase in value to around R3 million which belongs to the bank and you still owe around R1,8 million.

Borrow less improves your wealth

The less you borrow the less you pay. The less you pay the more you save for yourself. Saving up for a deposit on an R2 million home, say 20% (R4 00 000), will save you R540 170 over 20 years as you will be lending R1,6 million. 

Paying a little extra every month pays off the bond sooner saving. R1000 extra could reduce the term of the loan by 5 years saving you so much more.

So aim to borrow less over a shorter period of time so that you get to keep more in your pocket rather giving it to the bank. You get to own your home sooner too.

The World Economic Forum holds is an annual event where the “Who’s Who” of the Political and Business elites of the Globe descend on a small city in the Alps called Davos.

It is an opportunity to meet rich and famous key decision makers and exchange ideas and business cards to attract attention towards investment opportunities across the globe as well as align towards global issues in an attempt to make the world a better place.

I wonder how much of what is debated and discussed actually translate into anything. I also get a strong notion that there is a definite rank of importance placed on certain countries and global issues. So what might be important to one country may not be very important to another.

Let’s look at it this way….

If an alien came to earth for the first time with a spaceship full of cash to invest and he hovered over the globe looking at the various continents and countries, “Where do you think he would tend to go?”
In terms of global GDP:
The USA produces 30%
Europe 28%
China and Australia around 10%
When he hovers over Africa he will see our country nestled at the bottom of the continent producing about 0,4% of world GDP. Not very enticing…in spite of our sunny climate and scenic destinations.

So, to convince him that South Africa would be a choice investment destination would be a very hard sell. There are opportunities but at the same time, our image is tarnished in key areas of politics, strikes, crime, corruption, unemployment and electricity.

So I get the idea that the delegations from South Africa have to work very hard in Davos to even get heard. Then once they bend an ear its uphill all the way to try and convince why one should readily invest here for the long term. There are reasons but in today’s, global economic distress investors are looking for solid structures to minimise the current risks.

Perhaps the real benefit in attending is learning how different countries are dealing with their problems and bringing back practical working ideas that we could use here. We also will realise how we can align ourselves to world issues which are currently, world terrorism and global inequality.

Davos Stats:

• 1% of the world’s richest own more than the 6,9 billion poorest.
• If you saved $10 000 a day since the pyramids were built 4 900 years ago, you would only have a fraction of the wealth of one of these richest.
• If one sat on their wealth in $100 notes, most of the world would be on the floor. The middle class would sit at around chair height. The top two richest would be in outer space.

We have many things to get right in our economy and Davos is a place where I suppose we have to be seen in the hope of getting noticed by someone who would consider South Africa as an investment destination.

Damage control for the January Blues…..

It’s that time of year when we have turned the corner into the new year and need to get our finances back in order as soon as possible.

Here are 3 “Don’ts” which will help you to get off to a quick and effective start mindful that it’s always better to put up your sails before a storm than during one.

1 – Don’t ignore the damage

Get down to the details quickly and formulate an action plan for the new year.
Work out the damage before the statements arrive at the end of the month. The earlier you start the more prepared you will be before your next salary.
You are going to need to sacrifice somewhere to make up for the over indulgences of the festive season. You will find them by creating a detailed budget and splitting your expenses into “must haves” and “nice to haves”. The area of “nice to haves” will need to be scrutinised ruthlessly and there you will find the extra cash to pay off the debt. Target the credit card first as this is probably the most expensive debt.
You need to allocate towards interest and the amount owing. You should try to pay off as much of the principal debt as possible.

2 – Don’t borrow any more

Don’t borrow more to get out of debt. It’s like trying to fill up a bath with the plug out.
Put the plugin by shelving your credit card for a while and turn up the taps by squeezing out extra cash from your expenses.
Obviously, this will also mean that no more “nice to have” spending for a while. You can review this only once you are back on your feet.

3 – Don’t dip into your savings and investments as a quick fix

Work out how much you can allocate over time to get rid of your debt. Stick with the program until you are out of the water. Set a realistic time frame realising that debt robs you of potential savings. The sooner it’s behind you the more you will have to compound and create wealth for your financial freedom in the future.

Ideally, you should save towards a contingency fund during this year to ensure that you don’t fall into the same trap of “catching up” in the previous year. A great challenge for the new year…where you will have cash for the next festive season and avoid the stresses of the next year’s January Blues…..