When should you consider a second bond?
A bond is one of the lowest interest loans you can get and there are many times a second bond is a good idea. These are times too when they are not the best plan of action.
Most people take a bond over 20 to 30 years. Over time, the value of your property will generally increase and, in most cases, your income will increase year on year. What this means is that, in many cases, the bond become a lot easier pay after a few years. You also have equity in the property as the value of the house is more than the outstanding amount of the bond.
If you are fortunate enough to find that your bond has become extremely affordable, many people consider upgrading and buying a bigger house, a better house, a home in a better neighborhood or all of the above. That is not necessarily a bad idea but there are a few things to consider.
The costs of buying a new house and selling your existing property will consume a lot of the equity you have built up.
Agency fees, conveyancing fees, moving costs, the list goes on.
You could add on to your existing home or refurbish certain rooms or parts of the house. This is a great idea provided you can afford the repayments on the second bond and the improvements are going to increase the value of your house.
Do a few things for yourself that you really want but you will get the most return on bathroom and kitchen improvements.
You also want to be sure you do not over capitalize. Look at the market value of your home compared to the average price in your immediate neighborhood. If you have a house worth a million rand and that is the average for the area, spending R 500 000 on improvements will not give you a great return when you decide to sell.
By all means, improve but stay close to the average market price for your suburb.
Pay off debt
Another time a second bond is a good option is when you have accumulated a fair amount of personal debt. Credit cards, personal loans and other forms of credit charge significantly higher interest rates than you would pay on a bond.
Taking a second bond to settle these debts is a good idea provided you follow a few guidelines.
First, do not clear your credit cards and other debts and then run them up again. It sounds obvious but it happens all too often.
Secondly, do not take 20 years to pay off a second bond on debts that you would have paid off in a year or two. Despite the lower interest, you will still pay significantly more over the term of the loan.
Another reason you might consider a second bond is to treat the family to a dream holiday or some other luxury you have been wanting for a while.
Provided you are sure you can afford the additional bond repayments, it is a better way to finance the experience than putting it all on credit cards.
Obviously, saving for it first is the more prudent option but sometimes you need to splurge. At least do it at a lower interest rate.
Having said all of that, a really good idea is to pay more into your existing bond every month and reduce the term and total cost of the loan. I know it is a boring option but the savings will be significant.
Whatever option you decide on, do your homework first and make sure you can afford it and have considered all the potential risks. Once you have decided on the best option, enjoy!