Your mortgage bond is, almost without exception, the lowest interest loan you’ll ever get, and is often recommended as a cheap way to finance more than just your home. Banks can usually be convinced to extend a mortgage if your home has appreciated in value, but financial experts advise extreme caution when it comes to taking advantage of this option – particularly for expenses that are unrelated to your home.
“Your bond is both the cheapest form of financing there is, and the most expensive,” says Marc Hendricks, National Manager for Rawson Finance, the Rawson Property Group’s in-house bond originator. “Yes, mortgages have lower interest rates than most other types of loans, and if you’re extremely disciplined, they can be viable and cost-effective alternatives to taking out short-term or personal financing. For most people, however, using a bond instead of short-term finance results in paying – and risking – far more than they would have if they’d gone a different route.”
There are several reasons for this, Hendricks explains, starting with the long-term nature of a bond.
“Let say you buy a car for R300 000,” he says. “Normally, you’d take out vehicle financing with a typical loan term of five years and an interest rate of around 12% – or prime plus 1.5%. That would make your monthly repayments about R6750.
“If you use your bond to purchase that same R300 000 car, however, you’ll be paying it off over twenty years instead of five, and those repayments would drop to around R3000 per month – something that seems like a big saving on the surface. Unfortunately, by paying that car off over the extended period of your bond, the amount of interest accrued on the loan skyrockets astronomically. The result is that the bond-financed car ends up costing significantly more than one purchased using traditional vehicle financing.”
The figures certainly support Hendricks’ argument, with the total cost of purchase increasing from R400 000 using “expensive” vehicle financing to over R610 000 using supposedly “cheaper” bond finance to purchase the same R300 000 car. Sadly, as Hendricks’ points out, very few people actually pause to crunch those long-term numbers.
It must, of course, be noted that if you repaid the R300 000 into your bond over five years instead of twenty (by paying the same amount each month that you would have using vehicle financing) it would be a more affordable option in the long run. However, it’s not just cost that makes using your mortgage a questionable idea – there’s a big risk factor as well.
“Your property acts as collateral for you bond,” says Hendricks, “which means that if anything goes wrong and you can’t afford your monthly repayments, the bank can repossess your home and sell it to cover your outstanding debt. Now, if you increase those monthly bond repayments to buy other things, you increase the risk that you won’t be able to meet your monthly obligations when money is tight. If that happens, you’re not just going to lose your new car or whatever you spent the money on – you’re going to lose your home.”
Because of this, Hendricks generally avoids encouraging people to extend their home loan without a very good reason.
“It’s an ethical thing,” he says. “At Rawson Finance, we believe in promoting responsible financial decisions, rather than increasing our customers’ risk profile just to add to our bottom line.”
There is, however, one way you can utilise your bond for finance without increasing your risk.
“If you’ve been paying your bond off faster than required, and therefore have funds in your access facility, you can certainly tap into those for purchases that you’d otherwise have to finance,” says Hendricks. “It’s still a good idea to pay the money back into your bond as fast as possible to reduce your bond term and save on interest, but it’s a far less risky proposition than increasing your original debt.”
For more advice on best practices relating to property finance, or to enquire about applying for a new bond, contact Marc Hendricks at Rawson Finance Cape Town or call your nearest Rawson Property Group franchise.