Bond, Bankrupt Bond: The costs associated with bonds
James Bond has turned into an international icon for his bravery, quick wits, and dangerous actions. While every man wants to be James Bond in one way or another, it's important to not share the same approach when dealing with bonds, although they take after the same name.
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.
Registration, initiation, and conveyance fees serve as bond charges you can expect to pay. They join value added tax as the principal bond fees.
The fees are covered, but should exceed a rate of more than 3% of the total cost of the property. If the property appreciates in value like it should, the cost will be recovered within the first year or so.
Understand that bonds are top-heavy. By this I mean that when you take out a long term bond, the first third of the bond's duration is directed towards interest and not principal. So, when you sell back property quickly, you lose a lot and still owe a ton of principal.
When you sell the property within five years you may be staggered to learn that you still owe hundreds of thousands of dollars. The reason is you paid off a lot of interest but still owe a large portion of the principal. Only sell the property early if you figure to make a huge profit on the sell.
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.
Registration, initiation, and conveyance fees serve as bond charges you can expect to pay. They join value added tax as the principal bond fees.
The fees are covered, but should exceed a rate of more than 3% of the total cost of the property. If the property appreciates in value like it should, the cost will be recovered within the first year or so.
Understand that bonds are top-heavy. By this I mean that when you take out a long term bond, the first third of the bond's duration is directed towards interest and not principal. So, when you sell back property quickly, you lose a lot and still owe a ton of principal.
When you sell the property within five years you may be staggered to learn that you still owe hundreds of thousands of dollars. The reason is you paid off a lot of interest but still owe a large portion of the principal. Only sell the property early if you figure to make a huge profit on the sell.
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 Debt Consolidation Loan at
6:43 AM
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