As we approach the end of 2023, South Africans fortunate enough to have built up a nest egg over the course of the year may be wondering how to maximise the value of their money over the long term – for example, by paying down debt on their mortgages or investing in the stock market. But there is a third option to consider: installing a solar system.
Given the reality of ongoing load shedding, many households have realised the immediate benefit of an investment in a solar system for their daily lives and energy needs. However, there is a strong case to be made for solar as an investment option that can significantly benefit pockets in the long run as well.
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Read all our load shedding coverage here.
A high-quality, professionally installed solar system complemented by high-grade batteries and a capable inverter offers immediate convenience and reliable energy in the short term. But many people don’t realise just how big an impact it can have on their budgets through reducing their monthly electricity bills, freeing up money to invest in other things.
A typical solar system costs R200 000 for an average home. Below are comparisons of three typical options measured over a 10-year period – whether to pay down a mortgage, invest in the stock market, or invest in a solar system:
- Paying down mortgage
Firstly consider the option of paying down your mortgage – an attractive choice given the impact of rising interest rates.
A financially responsible, albeit conservative option, repaying your bond offers a guaranteed return on investment in the form of interest savings. This choice also offers a risk-free investment that will help to reduce your debt and thus improve your financial security and peace of mind heading into 2024.
However, using your savings to repay your mortgage may leave you with lower levels of financial liquidity as your funds are tied up in the property unless you have an access bond facility. Additionally, it may offer lower potential returns for your savings compared to other investment options.
For example, assume that your bond is valued at R2 million with a prime interest rate of 11.75%. If you channel the entire R200 000 amount towards reducing your mortgage, you would have saved R140 870 in interest over the 10 years.
- Investing in shares
While there are many investment options available to South Africans, let’s look at the potential benefits and drawbacks of investing in shares in the stock market.
Share portfolios represent a high-risk, high-reward investment option, as while you could potentially earn greater returns in the long term, these returns are not guaranteed, and you may experience high levels of investment volatility as markets rise and fall.
Investments in equity or shares are thus best guided by professionals or financial advisors. This option is also best suited to investors with a high tolerance for risk and a long-term investment horizon.
According to my calculations, if you were to invest R200 000 in shares and these were to generate average annual returns of 13%, your savings would have grown to a substantial R678 913 by the end of 10 years. A 13% return target is appropriate for a portfolio with an aggressive risk profile.
However, it’s important to note that this growth could also be impacted by various investment fees, taxes on interest or dividends, and capital gains tax when selling out of the investment.
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- Investing in a solar and battery system
Investing in a solar and battery system for your home could be a smart long-term financial move, especially as the world shifts towards more sustainable energy sources.
Plus, in addition to the environmental benefits and reducing your carbon footprint, solar systems act to immediately minimise your electricity bills. And finally, Sars offers incentives and tax credits for solar installations.
On the list of cons, solar systems can carry high upfront costs. This can be managed by financing the system through a rent-to-own option or even adding the cost of the installation to your mortgage. However, these options can result in a long payback period that typically spans between five to 10 years, limiting your liquidity in the interim as your investment will be tied physically to your property.
Despite this, the long-term cost savings and return on investment of a solar system are substantial. For example, assuming one could purchase the R200 000 system outright and assuming the property had an existing monthly electricity bill of R3 900, one could expect R1 407 in savings each month which increases in line with electricity inflation at 12% each year. After 10 years, the system would have generated lifetime savings of R308 925, and factoring in the 25% tax rebate on the panels, an internal rate of return (IRR) of 16% would be achieved on the initial solar investment.
Based on these examples, an investment in solar is, therefore a clear winner in terms of absolute annualised percentage returns. However, that your investment decision should be guided by your unique financial circumstances in consultation with a financial advisor.
Your decision will depend on your risk tolerance and financial goals. If you value environmental benefits and energy cost savings, a solar and battery system may be the right choice. If you prefer the guaranteed returns offered by reducing your debt, paying your bond may be the better option for you. And investors with a high tolerance for risk and volatility who are seeking greater liquidity and good returns may wish to consider an investment in shares.
Ultimately, it’s often wise to diversify your investments to balance risk and reward, but the key is to make an informed choice that is best suited to your needs.
Jean-Philippe Ghyoot is business director for Alumo.
