Gain financial flexibility from your home loan.
The Rand and the JSE have taken a beating and figures released this week show that the South African economy contracted in the second quarter of 2015. This means that we might very well be faced with a recession. And this means that those credit active consumers (around 19 million South Africans) could soon be facing big increases in interest rates and job losses as firms attempt to cut costs. It is now time to get your finances in order and where possible pay-off or, at the very least, consolidate your debt.
But before you try to close down every account remember that not all debt is created equal. Debt that is used to facilitate the acquisition of appreciable assets (that is assets that increase in value over time) can be considered ‘good debt’. A home loan, when used wisely and when well-managed, can be considered a good debt. This is because it can be used to fund the purchase of further assets, consolidate debts and can even be used as a savings account.
Why are home loans so ‘good’?
A home loan has all of this potential primarily because it is a form of secured lending. Simply put , this means that if you default on your debt the bank has the right to sell your house and use the proceeds of the sale to repay what you owe them. Your house ‘secures’ the loan and this reduces the risk that the bank will lose out when lending to you.
This lower risk to the bank means that they are willing to charge reduced interest and this in turn makes a home loan cheaper compared to most other forms of debt. This means that if you received home loan approval today you might receive an interest rate at the prime rate of 9.50% but if you took out a personal loan from the same bank you could be charge 20% or more.
The risk to the bank is further mitigated by the fact that, generally speaking, houses appreciate in value over time. This also makes property one of the safest and most lucrative long term investments. This appreciation can lead to you holding significant equity in your home even if you already have a home loan: equity is the difference between the market value of your home and the amount you still owe on your home loan. If the value of your home goes up, and you qualify on affordability, you can leverage this to gain access to further credit if you require it.
And finally, most home loans come with an “access facility” and this is a crucial component that makes a home loan so flexible.
What is an “access facility”?
This home loan account facility allows you to access funds you contribute to your bond OVER AND ABOVE the required minimum monthly repayment, i.e. you gain access to the prepaid capital amount. Please note that there is a distinct difference between this prepaid capital (via extra payments) and the repaid capital (via minimum monthly repayment). For more details on the access facility click here.
For example:
Your minimum monthly repayment is R5000 per month but you decide to contribute an extra R1000 p.m. At the end of the year you will have contributed R12 000 over and above the required monthly repayment. With the access facility you can, if you so choose, withdraw the prepaid R12 000 from your bond account and use it as you see fit. You do not gain access to the full R72 000 you contributed.
How do I get an “access facility”?
When you apply for your home loan make sure that the bank, your originator and your registering attorney are aware that you require an access facility. Each bank has a different procedure and these experts will be able to guide you through the process. Generally the only requirement is that you be approved for a loan and that you have, or that you open a transactional account at the same bank that granted you the home loan.
Each bank also has its own name for an “accessbond”, i.e.
ABSA: Flexi-reserve (Advance portion)
FIRST NATIONAL BANK: Flexi Bond option
NEDBANK: Nedrevolve
STANDARD BANK: Accessbond
Use access facilities as a type of savings and investment account
As long as the extra money remains in your home loan account you benefit from its reduction of the total amount you owe and this reduces the interest you are expected to pay. It’s a kind of ‘reverse’ investment or saving account: Instead of creating wealth by growing funds in a savings account you are creating wealth by more quickly reducing the debt you owe over an appreciable asset. Over the medium and long term this kind of saving/investment will outperform most other investment instruments.
If you run into financial trouble or you need those funds for something else you can easily withdraw them thanks to the access facility which is not always the case with other savings and investment options (32 day notice accounts for example). For further home loan savings ideas and tips click here.
Our Advice: Always ask for an access facility and place as much extra money as you can into your bond to reduce the term of the loan and the money you need to repay. If there is an emergency you can always have access to this extra money.
Use new home loans or current access facilities to consolidate debt
Short term credit like store cards, personal loans and credit cards attract high interest rates and these rates are much higher than the rate you’re likely to pay on your home loan (remember: secured lending!) A credit card could have as much as 22% interest and vehicle finance could be as much as 15%. A home loan will have interest of around 9.5% which is, as you can see, significantly less. It is a wise move then, where possible, to consolidate all your debts into the cheapest credit account and this will likely be your home loan. How?
- If you’re lucky enough to have funds available in your access facility you should consider using those funds to eliminate or immediately reduce the amount of short term credit you might hold.
- If you already have a home loan check the market value of your property and compare it to the amount you still owe. You might be able to leverage any available equity into a further loan which can be used to pay off your other short term debt , effectively consolidating it into your home loan account. In addition to reduced interest you will also benefit from having to only worry about a single account and making a single payment instead of tracking multiple credit accounts.
- Similarly, if you have an unbonded property or have paid off your home loan you can use the equity (which would run at 100% of the market value of your property) to apply for a home loan and consolidate your debt.
Our advice: Unfortunately by the time many people consider consolidating the debts their credit profile has already been tarnished which makes it very, very difficult to apply for a new or further home loan. We suggest that, particularly in the current economic climate, you consider consolidating your debt BEFORE your personal finances reach a crisis point. Pay off your credit card and car now, do not wait to be black listed!
Use new home loan or current access facility to acquire more assets
Another good idea might be to avoid that short term credit entirely: If you need to make a purchase consider taking a loan out on your house at the (possible) rate of 9.5% instead of a personal loan of 20%. Or consider using your access facility.
Our advice: It is a time for saving and being frugal but if you HAVE to make a purchase, pay a large bill or need money to start a business your home and a home loan might be the cheapest way of going about getting the cash you need. You can always apply for a larger amount than you need and immediately repay the difference and still have access to that amount for any future eventualities.
Crisis and Opportunity
This time of volatility in the global economy and the challenges we face at home make for trying times. Every Rand will need to be stretched and saved but if you wisely manage your wealth, as meagre as you may believe it to be, and learn as much as you can about your options you will be in a fine position when cycle returns to growth and opportunity.
De Mink Property Finance 