Just when you are over the initial thrill of having your bond approved, have concluded the paperwork for the purchase of your first home, and are basking in the glow of being a new property owner, a new realization will begin to dawn on you: you have access to the equity which your home loan represents! Equity is the current market value of your home, minus the outstanding mortgage balance, and can be translated into funds that are available to you in the form of an access bond.
How it works
There are basically two ways in which your home loan can be a source of extra finance. Firstly, you can deposit extra monies into your home loan account to help reduce the outstanding balance and the interest charged on it, and then, should you need emergency funds, you will still have access to these extra deposits.
Secondly, the appreciated value of your home can be converted into cash. From the moment you first sign on the dotted line to purchase your home, the property will begin to appreciate in value. For this reason, banks do not generally have a problem with giving you back some of the money you have paid off on your bond, in the understanding that your property is worth more after each year than the amount you originally paid, i.e., the value of your bond.
Before 2009 the value of residential property in South Africa increased on average by as much as 12% per year, which was well above inflation. However, since then the worldwide economic downturn has also put the property market in South Africa into a relative slump. According to the Standard Bank SA Residential Property Report of March 2012 the average nominal annual performance for median house price growth for the previous financial year had been -0,5%, but the property market is showing early signs of recovery, and the figure for the financial year ending March 2012 is +1,6%.
There are many benefits to an access bond:
- The interest rate on your home loan is just about the best rate you are ever going to get on money you borrow from a bank. Therefore it is a very favourable way of financing otherwise expensive debt, such as money for education fees, emergency purchases and debt reconciliation.
- Renovations or improvements you make to your home with the funds of your access bond will ultimately add to the value of your home.
- You do not have to fill out a new application for credit or provide the bank with additional security – access bonds are quick, easy and convenient, and you do not have to explain to anyone why you suddenly need extra cash.
- It is much simpler and less costly than registering a further advance or second bond.
- In a volatile property market, the value of your home could, contrary to the natural course of inflation, decrease unexpectedly to below the amount you originally paid for the property. If you have accessed the surplus funds, you may find that you owe the bank more than what your property is worth.
- If you are the type of person who could easily spend credit on frivolous purchases, such as extravagant Christmas and birthday gifts, you may find that an access bond is not ideal for you. Access bonds are best suited to people who do not have trouble exercising financial discipline.
- Another point to consider is that the worldwide credit crunch has made banks and financial institutions more cautious, also in South Africa, and some have instituted more controls on their access bonds.
Because of the obvious benefits, access bonds are tremendously popular, and all major banks in South Africa offer access bonds as part of their home loan products.