Whenever I think I have a handle on tax and investments, some fresh hell reveals itself. Our friend Ros Brodie had a fascinating question about share events and capital gains tax (CGT) this week. I was hugely impressed that she managed to sell a share she never bought. It’s exactly the kind of voodoo I can get behind. Ros had two CGT questions. Firstly, how does tax work if you take shares in lieu of dividends? Secondly, what about shares she got as a result of the unbundling of a different share?
Carel Nel wrinkled my brain in this episode. It turns out residual payments on home loans are a thing. I did not know this. What Carel found out, to his dismay and mine, is that you still pay interest on the residual amount. His email is below. Once again I’ve shortened it somewhat, but the good bits are there.
I've been trying to figure out how residual payments on a loan work, but it doesn’t make sense to me.
The way I understand that it is if you take a residual of whatever amount, this amount is payable at the end of the term, whether you pay it in a lump sum or refinance it. What makes sense to me is then that this residual should not be part of the loan calculation at all.
Let's say you take a loan of R100 000, you pay a deposit of 10% and you elect to take a residual of 25%. This means that effectively you need a loan of R65 000. So, the monthly installments should be calculated with R65 000 as the total, the term and interest rate indicated. Right?*
The interest paid each month is calculated on the total amount outstanding which includes the balloon amount. After every month's payment, the total outstanding goes down less due to the lower installment meaning you pay more interest.
What I would have hoped for was if the interest is not calculated to included this balloon amount.
*Turns out this is not right. As Simon points out in the episode, when you take the loan amount, the bank gives you the full amount, even though you are paying back a smaller principal amount.
If you listened last week you would have heard us mention the new US Treasury Bond ETF by RMB. I was piqued, so I found out more. If you are equally piqued, read it here.
Lastly, Simon did his super cool tax-free investment talk for 2017 last Thursday. It's always chockers full of information. View it here. In addition to the great presentation, I met someone who has started an investment education club, which excites me more than anything investment-related should ever excite anyone. If you don't ordinarily come to the JSE Power Hours, you're missing out.