Author Topic: Living in South Africa - mortgage, investment, or both?  (Read 1860 times)

CTLiving

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Living in South Africa - mortgage, investment, or both?
« on: January 30, 2016, 01:54:39 AM »
Hi everyone

This is a bit of a plea for guidance, as I'm really not sure what makes the most logical sense to do in our case. I'll try and organize this post as much as possible, starting with the investment options available here in South Africa - I'll put all the amounts in dollars, will make it a bit easier to digest. Current exchange rate is about R16 to the dollar, which is... terrifying, and is also a large part of why I'm unsure of what our plan should be.

To the wall of text!

Available investments

First, there's what's known as a retirement annuity (RA). I believe this is roughly equivalent to a 401K, in that it allows you to stash up to 15% of your income in a tax deferred account. You're only taxed on your income, minus what you contribute to the RA. This amount is now being raised to a maximum of 27.5% for the new financial year, as of March 2016. This is pretty massive, as you'll only be taxed on 72.5% of your income, if you contribute the maximum 27.5%. The upsides to an RA are fairly good - any capital appreciation, dividends, etc, are entirely tax free, and the account is protected from your creditors. The chief downside is that your RA is only accessible once you hit 55 years of age, but it's that way because my country is absolutely terrible at saving, so all in all, it's likely a good thing.

Secondly, we have a tax free savings account - this was introduced last year. This allows you to save a maximum of roughly $1875 per year of your after tax money, and any and all proceeds and accumulation is completely tax free. This account is capped at about $31250, which will take about 16 to 17 years to hit with the low monthly maximum. You can invest this money however you want if you go via a broker or ETF platform, which is quite nice. The downside is the low yearly limit, and worse, if you take any amount out, that's it, it's gone. There's a maximum contribution per year, and going over that hits you with a 40% tax. It's another way the government is trying to encourage long term savings - you're penalized if you take any money out before it's been there for a while, so you'll lose out on any compounding.

Thirdly, you have your standard ETF's and unit trusts. The unit trusts vary between being horrendously overpriced (TER of 2% plus), to some newer UT's that are passive (TER of 0.4%, cheapest in the country, and where my RA is sitting). The ETF's also range in price, but on average, they have a TER of about 0.3% to 0.5%. The international ones (DBXUS for instance) have a TER of about 1%, I believe.

Mortgage

This is the doozy - we bought our home 2 years ago for about $78 000, with a 100% mortgage over 20 years. When we bought, prime was a whopping 9.5%, and it's gone up now to 10.25%,as of the 28th Jan. Ours is marginally below that, but let's say it's about 10%. Having done the sums, we realized that after 20 years, we'd have paid about triple what the property was actually worth, so we've been contributing extra each month to try and bring it down. We owe about $60 000 now.

This is further complicated by the fact that in Cape Town, rents are ridiculous. To live in an equivalent house, the rent would be fairly close to our mortgage payment. If the rents were, say, a 1/4 of the mortgage, then we'd much rather do that , but it makes sense to buy, if possible.

So, the question is, how should we proceed?  Do we max out our RA and tax free savings, and contribute whatever's left over to the mortgage? Or do we hammer the mortgage, and contribute less, if anything, to the retirement accounts? The tax free savings seem like too good a deal to pass up, but the mortgage costs us an insane amount of money each month. On the other hand, do we really want tie up our entire net worth in a house in a country where the economy is keeling over? At least via the investment accounts, one can invest in foreign markets, and try and hedge the Rand's depreciation.

My inclination is to max out the RA and tax free savings, if only to gain exposure to the rest of the world. If we pump everything in to the mortgage, then yeah, we may have a paid off house, but nothing much else to show for it.

I'd appreciate any and all opinions here - thanks in advance!

schoopsthecat

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Re: Living in South Africa - mortgage, investment, or both?
« Reply #1 on: January 31, 2016, 09:01:24 PM »
My sister and brother-in-law live in Cape Town, and have been dealing with similar questions. I'm curious the answers you'll get and will share them. In their case, I think they're going to move back to the US (he's South African and she's American) mainly due to the devaluation of the rand. They love living there though.

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Playing with Fire UK

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Re: Living in South Africa - mortgage, investment, or both?
« Reply #2 on: February 01, 2016, 05:08:32 AM »
What is your average tax rate and marginal tax rate?

(When) are you planning to FIRE? Will this be in Cape Town, SA or international? How old are you?

In your scenario I'd be worried about the Rand devaluing if I planned to move overseas. The high mortgage interest rate will be lower after inflation, so I'd look at how that has performed over the life of the mortgage to decide if I needed to panic now, and track it to see if I should panic later. Also maybe look at how your payrises compare to the mortgage payments (or the average cost of living rises vs inflation vs interest). What are house prices doing?

If house prices and your pay rises are keeping up with mortgage payments and the cost of living, I would be less concerned. I'd look to diversify investments away from one house in Cape Town, so would be investing the bulk of my spare cash.

CTLiving

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Re: Living in South Africa - mortgage, investment, or both?
« Reply #3 on: February 02, 2016, 06:05:52 AM »
Thanks for the reply! To answer....

What is your average tax rate and marginal tax rate?
Tax for the two of us is roundabout 25%

(When) are you planning to FIRE? Will this be in Cape Town, SA or international? How old are you?
FIRE'ing is so far in the future that no dates can be set, but at the current rate of savings... mid-40's. Location? That is another question that plagues us - I love my country, but it's getting increasingly clear that it may be a prudent move to get out. Age, we're both early 30's.

In your scenario I'd be worried about the Rand devaluing if I planned to move overseas. The high mortgage interest rate will be lower after inflation, so I'd look at how that has performed over the life of the mortgage to decide if I needed to panic now, and track it to see if I should panic later. Also maybe look at how your payrises compare to the mortgage payments (or the average cost of living rises vs inflation vs interest). What are house prices doing?

If house prices and your pay rises are keeping up with mortgage payments and the cost of living, I would be less concerned. I'd look to diversify investments away from one house in Cape Town, so would be investing the bulk of my spare cash.

Salaries are rising at least with inflation, and despite the recent interest rate bump, mortgage payments are still affordable.  Yeah, I'm thinking that since mortgage payments are only getting cheaper in real terms as the years wear on, it would make more sense to invest. Or, y'know, get the hell out :P

Thanks!

Playing with Fire UK

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Re: Living in South Africa - mortgage, investment, or both?
« Reply #4 on: February 02, 2016, 06:46:15 AM »
Yes, South Africa is a wonderful place (at least to visit), but I'd be nervous about investing everything locally and in ZAR.

Check out http://www.thefinancezombie.com/2015/11/the-bridge-to-financial-independence.html ; it might give you some insight into the balance between investing in the RA account vs the tax free account. [It is a UK article, but our rules on accessing retirement accounts seem similar - you will also want to check what the rules are on withdrawing from your RA if you are out of the country].

I'm a similar age to you - my plan is to put enough into my retirement accounts to last me from 55 until forever (I'm grinding this out now because our tax advantage is probably going to change in a year or two). To get me to 58 without work I'll need a pot of tax advantaged accounts and taxable accounts (eventually). This doesn't need to be 25x spending though; I am working on (spending - growth) x (58 - 42) + safety margin - which I put in a giant spredsheet.

If your tax rate is 25% and dividend tax is 15% and capital gains 33% over the exemption amount (I think), spend some time working out what is tax efficient. It might be worth mixing up growth and yield funds to optimise your tax position (the passive investment police might not like this!) And I would seriously consider holding funds in currency/ies other than the Rand (again check if this has a tax implication).

Agreed that there is less sense in overpaying a mortgage if the payments are reducing in real terms (although I would be initially horrified at considering investing while holding debt at 10% - it is the interest less inflation that really matters); maybe a balance is having investments that you wouldn't mind cashing out if interest rates rose while wages/inflation stagnated.