Access bond vs refinancing your home loan

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During financially stressful times, it may seem easy or tempting to dip into your access bond to tide you over until things get better. However, this is not the answer and before you approach your bank, make sure you know the difference between an access bond facility and a re-advance on your home loan.

Mtimkulu defaulted on his clothing accounts. He was also placed under judgment for outstanding debts. However, once he paid up his clothing accounts and also received a consent to rescission of judgment, he thought that was the end of the matter.

Mtimkulu was surprised when his application for a re-advance on his bond at First National Bank was declined and he was told to wait six months before applying again. “Please advise on this matter as I believe that I have a right to access funds from my bond,” he asks City Press.

First, it’s important to understand the difference between an access bond and a re-advance on your home loan, says Monde Motha, channel manager at FNB home loans division. FNB refers to an access bond as a Flexi-bond facility. This option allows you to access any additional or lump sum funds paid into your bond. This means any funds paid into the bond, over and above your monthly instalment.

The re-advance option, on the other hand, refers to available funds that you can apply for. This is usually the difference between your current outstanding bond amount and the initially registered bond amount. For example, if you bought a home for R1 million in 2007 and the outstanding bond amount is now R600 000, you could apply for a re-advance of the R400 000 difference. However, you must bear in mind that a re-advance unlike an access bond facility is subject to credit approval. In Mtimkulu’s case, he did not pass the credit check but in six months time, if he reduces his expenses, he may then qualify for a re-advance on his home loan.

Motha says an access bond facility should ideally be requested upfront when you apply for a home loan, however, it can also be requested at any point after registration of the bond.

Absa allows you three different options when it comes to accessing money via your home loan. The first is an access bond. Rautenbach explains that the money can be paid monthly or as a once-off deposit. For example: if the required monthly repayment on your home loan is R2 000 and you pay in R3 000 a month over a period of one year; you will have paid an extra R12 000 over the year. This can be withdrawn either as a once-off amount of R12 000 or in portions with a minimum withdrawal of R1 000.

Financial strain

“There are many clients applying for further advances on their current home loans to alleviate the burden of repaying other credit which is charged at higher interest rates. All expenses are taken into account when doing an assessment, as affordability needs to be in place. We do not approve further lending on the basis of clients consolidating debt,” Motha explains.

Absa’s head of retail banking, Arrie Rautenbach, points out that despite low interest rates, many consumers remain financially strained against the background of rising living costs (food price inflation, transport inflation, rising property running costs), low savings and relatively high levels of debt. “A large number of our customers normally use these (access bond and re-advance) facilities and the increased utilisation is normal during this time of the year as customers increase their expenditure,” he says.

Timothy Akinnusi, the head of sales and customer value management at Nedbank, says clients most often access funds from their home loans in order to fund home improvement projects, settle unscheduled medical bills and historically, during January and February, to pay school and university fees.

A re-advance on your home loan

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A re-advance is viewed as a new credit agreement and as such, is subject to credit application criteria as per the National Credit Act. This means the bank has to do a new assessment of your affordability, taking into account your income and expenses. You may have taken on new expenses since you first took out your home loan and this will have a bearing on your re-advance application. Your bond repayment is also recalculated to take the re-advance into account.

A re-advance application will include a property valuation if the last property assessment was undertaken more than six months previously.

In addition to a re-advance, Absa offers you a “further advance” option. For example, say you have an eight-year old home loan of R200 000 with an outstanding balance of R120 000.  If you require R160 000 for renovations,  and the value of the property is now R350 000, you can increase the loan amount to R280 000. A further advance is also subject to an affordability calculation.

Debt warning!

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While it may be tempting and on paper seems like a good idea to dip into your home loan for the purpose of consolidating your debt, you should be very wary of this option. Although you may have the best intentions at the beginning, you need to ensure that you pay off the consolidated debt within the same time frame as it originally would have been paid. For example, if you consolidate your store debt and vehicle finance with a lump sum from your home loan, you should then make sure that you pay off those amounts within your home loan over six months and five years respectively. If you do not, you end up stretching your debt out over 20 years (the period of your home loan), which will cost you significantly more in interest costs over the long term.

This article was first published in City Press on 8 December 2013. 

 

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