Friday, 26 April 2013

Pay off your bond before retirement

IF YOU’RE dreaming of a carefree retirement, one of your major aims should be to make sure you will be living rent or bond-free.

“When you retire and become dependent on a fixed income, the last thing you need is a surprise increase in home loan repayments or rent,” says Braam de Jager, national operations manager of Aida.

“Many people planning for retirement overlook their home loan commitments – especially if the repayment is automatically deducted from their salary. They forget that once they stop earning, that repayment will have to come out of their monthly pension.”

To avoid this, Aida suggests anyone nearing retirement should make it a priority to pay off their home loan beforehand. That will ensure one of the biggest cost-of-living items is reduced to the cost of municipal rates and services and that there can be no nasty interest rate shocks in the future.

Of course, the surest – and easiest – way to ensure your home loan is paid off by the time you retire is to pay more than the minimum monthly repayment required, right from the start, De Jager says.

“This will ensure that the loan is liquidated in far fewer than 20 years – and will generate a very large saving in interest charges.

“What is more, it may enable you to supplement your retirement funds for five, or even 10, years by the amount that you would otherwise have been paying off your home loan.”

Alternatively, he says, if retirement is going to mean a move to a new home anyway, you might be able to eliminate remaining loan obligations on your old home by downscaling.

“Most retired people do not need – or want – a large home that requires a lot of maintenance and upkeep. And if they are selling a family home, the proceeds may well be enough to buy a smaller home for cash.

“The lower running costs of a smaller home will also help them maintain their standard of living, despite having a lower income, and having to cope with the steady erosion of its buying power through inflation.”

And finally, if the sale of a family home is not on the cards, it may be worth using a portion of the taxfree lump-sum payout on retirement to settle the outstanding balance on a home loan.

“Overall,” says De Jager, “the peace of mind and practical benefits of bond-free or rent-free living in retirement will more than compensate for any short-term financial sacrifice you have to make now, while you are still working and earning, to achieve that goal.”

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