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Invest my spare money, or pay off my bond? It depends…

Invest my spare money, or pay off my bond? It depends…
Kenny Meiring
By Kenny Meiring
7 Jul 2024
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The stock market is looking more positive and there is a good chance that you could get a better after-tax return from investments than you would by reducing your home loan. But the answer is no longer that obvious.

Question: I will be retiring in 10 years and I am paying the maximum into my retirement savings. I have extra funds that I can invest. Would you recommend that I use the money to pay off my bond, or should I invest it elsewhere?

Answer: I like to follow a structured approach when it comes to investing. There are certain things you need to have in place before you make an investment.

Protect your income stream


Before you invest, the first thing you need to do is to ensure that your source of income is assured should you not be able to do your job. This is usually done through an income-protector policy.

In the past this was not a major issue as most people worked for large companies, which would pay you if you became unable to work.

But as more and more people work for themselves, they often do not have this cover and can suffer real financial hardship if something happens and they are un­­able to work. It is vital that you put this protection in place before you start investing.

Investments with tax concessions


Once this has been done, the first investment type you need to look at is one that gives you tax breaks.

Each year, you are allowed to contribute up to 27.5% of your taxable income to a retirement investment and have this amount come off your taxable income.

This is a “use it or lose it” benefit, so if you don’t use it one year, it will not roll over to the next. You will struggle to find an investment that will give you the kinds of returns that this does once you take the tax break into account.

Interest on debt


Before you start making other investments, you need to check the interest rate on any debt that you have. Any investment you make must be likely to deliver a return that is higher than the interest rate on any debt. If not, then you should clear the debt first.

This brings us to your question. How likely is it going to be that the returns on an investment will do better than what you are paying on your bond?

Had you asked me this question a year ago, the answer would have been easy. Home loan interest rates were high, and the expected returns on the stock market were not looking that good. It would have been a challenge to find low-risk investments that provided a higher return than what you were paying on your bond.

However, things have changed since the election. There is talk of interest rates being cut over the next couple of months. The stock market is looking more positive and there is a good chance that you could get a better after-tax return from investments than you would by reducing your home loan. The answer is no longer that obvious.

My recommendation is that you should speak to your financial adviser to get a good idea of what they expect  the returns to be on a typical investment after tax and costs have been deducted. You would then compare this rate with the one you’re paying on your bond. If it is higher, then invest before you pay off your bond. If it is smaller, then channel the additional funds into your bond before you invest.

Alternatively, you could hedge your bets and put some funds into the bond and the rest into an investment. That may be the best option while we are going through political and economic changes. DM

Kenny Meiring is an independent financial adviser. Contact him on 082 856 0348 or at financialwellnesscoach.co.za. Send your questions to [email protected].

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R35.


You may write a letter to the DM168 editor at [email protected] sharing your views on this story. Letters will be curated, edited and considered for publication in our weekly newspaper on our readers' views page.

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