Your home loan is probably the largest amount of money you will ever borrow, spread out over the longest term. This makes it a huge commitment that can be pretty daunting at first, but your mortgage can also be a useful financial tool for more than just your house.
This is according to Mike van Alphen, National Manager for Rawson Finance, who says your mortgage is the cheapest way to borrow money; you’ll never get interest rates that low on any other type of loan account.
He explains that bonds these days aren’t a one-way thing. Yes, you have to make your monthly payments, but you can also make withdrawals, a feature that has become quite standard across banks in South Africa, and offers a great financial opportunity for people who know how to use it wisely.
Van Alphen says the danger of using your bond to finance other things is when you’re borrowing long-term finance for short-term gains.
“For example, I’d never advise buying a car with your bond and paying it off over twenty years. Your car won’t last twenty years, and the interest you pay over that time will add up to more than if you’d taken a more expensive loan over a shorter period of time.”
But, he says paying that car off over five years at the lower interest rate your bond offers is a smart option if you have enough equity in your bond and the discipline to stick to the timeline.
Equity is the key to being able to use your mortgage for low-interest finance, he says. The way you can withdraw money from a bond has changed a little, and he credits the National Credit Act for recent legislation designed to help prevent consumers from getting in over their heads in debt.
“You used to be able to draw down the difference between the total bond granted and the amount left to pay. Now you can only withdraw the amount you’re in advance; any extra money you’ve paid in above and beyond your minimum payments.”
As a result, if you want to use your mortgage to finance other things, you need to start paying off as much as you can as early on in the loan process as possible. This will increase your equity over time and grow the amount of money you can withdraw for other purposes, he says.
Of course, there is also the option to negotiate with your bank to increase your total bond amount. Van Alphen says you can increase your bond several times over the years, but it’s only advisable to do this when you plan on using the money to increase the value of your property.
He says banks are reluctant to increase mortgages in order to finance unrelated things, as they don’t want the value of your loan to outweigh the value of your property.
The best way to take advantage of the low interest rates of your bond is to use your equity as an alternative to taking out a short-term loan, but to ensure that you pay the money back into your bond over the same term that loan would have stipulated.
After all, there’s no point in paying less interest if you’re going to be paying it for four times as long.
Van Alphen says using your mortgage is a great way to finance things, but you have to be smart about it, and you have to be disciplined.