A BENCHMARK HIDING IN PLAIN SIGHT
In a world focused on market returns, an important benchmark is often closer than we think.
Following the South African Reserve Bank’s recent rate hike, the prime overdraft rate now sits at 10.50%. For many households, that means home loan rates are once again firmly in double digits. With that comes an important question:
What return do you actually need from your investments to stay ahead?
In this month’s Financial View, we explore a benchmark that many investors overlook, one sitting right on their balance sheet.
The “risk-free” return hiding in your bond
At current levels, every additional rand paid into your home loan is effectively earning you a guaranteed return of 10.50%. That’s not an estimate. It’s not subject to market movements. It is a known saving in future interest.
In investment terms, that immediately changes the conversation. We often evaluate opportunities based on expected returns:
- Equities might deliver 12–15% over the long term, but with significant volatility
- Fixed income yields are improving, but remain debateable
- Cash is finally offering something again, but typically lags inflation over time
Yet sitting quietly in the background is a double-digit, risk-free return, and one that many investors don’t treat as an investment at all.
The tax effect: raising the bar even higher
The comparison becomes even more interesting when tax is considered.
The savings on your bond are effectively after-tax returns. You are reducing interest that would have been paid using after-tax income, and that saving is not taxable.
Contrast that with traditional investments:
- Interest income above R23 800 under 65 and R 34 500 over 65 is taxed at your marginal rate
- Dividends attract a 20% withholding tax
- Capital gains are partially taxed when realised
So, a 10.50% “return” on your bond is not directly comparable to a 10.50% investment return.
Depending on your tax bracket, an equivalent pre-tax return may need to be closer to 13–15% to compete. That’s a significantly higher hurdle than many investors realise.
Certainty has value
Equities remain essential for long-term growth, and this is definitely not a case against investing in equities. But it is worth recognising the fundamental differences between paying down debt and investing in markets. One offers certainty; the other offers probability.
When you reduce your bond:
- The return is guaranteed
- The benefit starts immediately and compounds over time
- There is no volatility risk and no risk of capital loss
- There is no behavioural risk, no temptation to panic or second-guess your decision
By contrast, market returns require time, patience, and the ability hold your position and to ride through difficult periods. In a higher-rate environment, that certainty of returns becomes far more valuable than it is often given credit for.
The comparison trap
A common line of thinking is:
“If markets can return 15% and my bond costs 10.5%, I’m better off investing.”
But this comparison assumes a smooth, predictable outcome, which is rarely how investing works in practice.
A more useful question is:
“What return do I need, after tax, after costs, and the return adjusted for risk — to beat a guaranteed 10.50%?”
For many investors, this means allocating more toward reducing home loan debt than they traditionally would.
The behavioural advantage
There’s also a less tangible, but very real benefit.
Every additional payment into your bond:
- Reduces your long-term financial obligations and the term of the debt
- Improves future cash flow flexibility
- Creates a growing sense of financial security
Over time, reducing debt frees up income that would otherwise service repayments, creating meaningful capacity to invest in the future.
Unlike market investments, there is no noise. No headlines. No urge to react. Progress is consistent, visible, and permanent.
It’s not an either/or decision
Very important to note that this is not an argument to redirect all capital into your bond.
A well-structured portfolio still includes:
- Long-term equity exposure
- Retirement contributions
- Tax-efficient vehicles like TFSAs and RAs
- Adequate liquidity
But it does make a strong case for rethinking how you allocate surplus cash.
Instead of asking:
“Should I invest or pay down my bond?”
A better framing might be:
“How much of my portfolio should be allocated to a guaranteed 10.50% return?”
For many investors, the answer may be – more than they currently expect.
A practical takeaway
Even small additional repayments can have an outsized impact:
- Shortening the term of your loan by years
- Materially reducing total interest paid
- Strengthening long-term financial resilience
And importantly, this is achieved without taking on additional risk.
The quiet outperformer
When rates rise, attention naturally turns outward, to markets, forecasts, and opportunities. But sometimes the most compelling return is the one already embedded in your finances.
At current levels, your home loan is not just a liability. It is a benchmark and quite a demanding one.
In today’s environment, getting rid of debt, earning a double-digit, tax-efficient, risk-free return is not something investors should overlook. If you can afford to allocate some of your cashflow towards reducing debt, it’s probably a very sensible thing to do.
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