BOR­ROW­ING ON YOUR HOME LOAN

Bor­row­ing money on your ex­ist­ing home loan may lead to some nasty sur­prises if you’re not care­ful, writes

CityPress - - Business -

Paragon Lend­ing So­lu­tions re­cently is­sued a me­dia state­ment warn­ing in­vestors and small busi­ness own­ers that if they try to ac­cess ad­di­tional cap­i­tal through their home loans, they may trig­ger changes that could re­sult in higher in­ter­est rates.

This is par­tic­u­larly true for in­di­vid­u­als who fi­nanced their homes prior to the fi­nan­cial melt­down in 2008. Since the credit cri­sis, banks face more strin­gent fund­ing cri­te­ria through Basel III re­quire­ments, while the re­cent amend­ments to the Na­tional Credit Act tight­ened the amount banks are al­lowed to lend based on cus­tomer af­ford­abil­ity.

Ac­cord­ing to Paragon, if your orig­i­nal bond was prime mi­nus 2%, a new bond is­sued to­day would be closer to prime and any changes to your loan fa­cil­ity with the banks could still trig­ger new rates.

“Ex­am­ples of this could be a change in sure­ty­ship, with­drawal of a share port­fo­lio as se­cu­rity, or even an ad­di­tion to the deal that would log­i­cally seem ap­peal­ing, such as ad­di­tional se­cu­rity to the fa­cil­ity,” says Gary Palmer, CEO at Paragon Lend­ing So­lu­tions.

Praven Sub­bra­money, CEO of pri­vate lend­ing at FNB, con­firms that since 2008, reg­u­la­tion gov­ern­ing banks has changed, re­sult­ing in stricter cap­i­tal and liq­uid­ity re­quire­ments for banks world­wide, hav­ing a di­rect im­pact on the cost of fund­ing.

“Clients en­ter­ing into new credit agree­ments are as­sessed for the new con­tract and the in­ter­est rate on the new con­tract may be lower or higher than a pre­vi­ous agree­ment”.

Be­fore you ap­ply to draw down funds from your home loan, you need to un­der­stand whether the money will be com­ing from pre­paid fund­ing – in other words money that you added into the home loan over and above your monthly re­pay­ments – or whether you will be bor­row­ing from the eq­uity in your prop­erty.

Your typ­i­cal ac­cess bond or “flexi” fa­cil­ity al­lows you ac­cess to pre­paid funds and ac­cess­ing these funds will not change the terms of the con­tract. Sub­bra­money, says, how­ever, in or­der to com­ply with rel­e­vant reg­u­la­tory re­quire­ments, the bank is obliged to re-con­tract with clients who want to un­lock eq­uity in their prop­erty that re­quires a change to ei­ther the loan term, bond amount or col­lat­eral (prop­erty) type.

An­drew van der Hoven, Stan­dard Bank’s head of home loans, ad­vises that, be­fore draw­ing on your home loan, you need to care­fully con­sider the rea­sons for mak­ing any changes to the loan and make con­tact with your bank to un­der­stand how this will af­fect you.

If you have a typ­i­cal ac­cess bond where you have paid ad­di­tional funds into the ac­count over and above the monthly in­stal­ment, then you can draw down on this with no changes to your in­ter­est rate as, ef­fec­tively, you have paid the funds in ad­vance.

If, how­ever, you want a re-ad­vance or fu­ture ad­vance, you will be sub­jected to the new af­ford­abil­ity rules and this could af­fect the in­ter­est rate charged.

Nondumiso Nca­pai, head of busi­ness de­vel­op­ment at Absa Home Loans, ex­plains that a re-ad­vance is where the cus­tomer is able to ap­ply for the loan up to the orig­i­nal amount that was bor­rowed at the out­set of the loan. A fur­ther ad­vance is where they re­quire more than the orig­i­nal loan amount. In this case, you would need to go through a reg­is­tra­tion process to reg­is­ter an in­creased bond amount.

Absa is the only bank that has a mul­ti­plan op­tion, where the ad­di­tional loan is man­aged as a sub­ac­count linked to the pri­mary home loan and, there­fore, the new in­ter­est rate would only ap­ply to the new loan and would not af­fect the ex­ist­ing home loan rate.

Tim Akin­nusi, head of sales and cus­tomer man­age­ment at Ned­bank Re­tail, con­firms that with­drawals from ad­di­tional sav­ings will not af­fect in­ter­est rates, but with­drawals on eq­uity will re­quire a new credit as­sess­ment. “In the case of clients seek­ing a fur­ther loan be­yond their ini­tial loan value, then we will re-price the loan as it’s a new credit agree­ment,” says Akin­nusi, who adds that even with the po­ten­tially higher in­ter­est rate, the cost of a home loan re­mains the cheap­est form of credit.

In a nut­shell, if you have used your mort­gage as a sav­ings ac­count and put ex­tra funds in, then there would be no change to your home loan if you made a with­drawal up to the amount you have saved. If you want to ex­tend the pe­riod of the home loan, us­ing the house as col­lat­eral to take a fur­ther loan, you can ex­pect to pay a higher in­ter­est rate and pos­si­bly fur­ther reg­is­tra­tion costs.

These costs and in­ter­est rates could af­fect your en­tire home loan amount or only the amount you are cur­rently ap­ply­ing for.

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