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 "wh...
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.
People who buy and sell property within five years lose money. It’s an alarming statistic. The main reason is costs associated with buying property derive from a home loan or bond. These loans or bonds are designed for the long-term and not short-term, so when they are sold back quickly, the losses are heavy.
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.
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.
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.
Costs associated with a bond are relatively low as long as the borrower takes a long term view of property ownership and is able to meet the commitments throughout the duration of the bond.
Graham McKenzie is the content syndication manager at South Africans leading
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