A further loan on your home loan is also known as a further advance or home equity loan, or more commonly, a second bond. You normally qualify to register a second bond against your property when the value of your property has increased or you want to improve your property through renovations or extensions, so that the value of the property after improvements will be greater than the value of the original bond. A second bond needs to be registered in the same way that the original bond was.
Registering a second bond has become a popular way of debt consolidation, and in a time where many people are finding themselves drowning in debt, it may be a lifesaver to refinance your debt as part of your home loan, attracting a far lower interest rate than all other forms of credit. You can apply for a second bond at a different financial institution to the one where the first bond was registered, and some financial institutions in fact specialize in debt consolidation for home-owners through the registering of a further bond against a property.
Registering a further loan will not take as long as the registration of your original home loan, because there is no transfer of property taking place. There is also no transfer duty to be paid.
Often the bank or financial institution will assist you with bridging finance while you are waiting for the further loan to be registered.
Disadvantages and cautions
A further loan or second bond will have to be registered, and this will result in legal and administrative fees.
Interest rates on further loans are generally higher than on first home loans.
Registering a further loan may also affect the rate at which your original home loan has been calculated, i.e., it may affect your credit rating to your detriment.
There are certain conditions to registering a further loan against your property. In addition to requiring equity, i.e., the property should have increased in value, so that it is worth more than the original bond, you also need to earn enough to finance the increased loan amount. A bank or financial institution will also look at your overall indebtedness before granting you a further loan or second bond, although they generally are sympathetic to people wanting to use the further loan for debt consolidation, realizing that their creditworthiness is probably not fantastic.
Even if you qualify in terms of the property’s value and your ability to afford the repayments, you may not be granted a second bond if you have defaulted on your existing home loan.
Be aware that if you are using a further loan for debt consolidation, you are financing shorter-term debt over a longer term. You could mitigate this by paying off the further loan over a shorter period, i.e., the period you would normally have needed for the debt you have consolidated into a second bond.
The term of a home loan is normally 20 years, and the same goes for a second bond. You can opt to extend the period to 25 or 30 years, but you have to know that this will result in proportionally a greater percentage of your repayments being spent on interest. If you have already registered a further loan against your property, you can even apply for a so-called third bond – the same conditions will apply as with a second bond.