Part one in a two part series on Bond types available.
1. Ordinary Home Loan (Bond)
In SA it remains the most popular way of financing a property. The bond is paid off over the lifetime of the loan that can vary between 5 to 30 years. The monthly repayments include capital and interest repayments.
Interest rates are an important factor to consider, since this will determine how much you pay for your home loan at the end of the day. Although there is a market rate, the interest rate varies from lender to lender.
Increase your monthly payments to reduce the term and interest of your loan. Since the majority of each indivudual’s monthly installments will go towards interest repayments (especially in the beginning) you will greatly reduce your capital debt by such an increase.
Interest is calculated on a daily basis and if your bond payment is due on the 30th of every month, make your bond payments five days earlier each month and save in the long term or split your payment amount between the 15th and the 30th and you save even more. If you make your bond payment on the 15th instead of at the 30th, you are saving 15 days worth of interest.
For additional savings maintain your original payments even if the interest rate drops. This way you can pay off your bond in record time and save on interest, without any affect on your current budget.
2. Access Bond
The access choice has more advantages than conventional bonds. With this bond a person has the opportunity to use the paid-off amounts at any stage and without prior permission from his financial institution.
This kind of bond is convenient if a person needs money at a later stage for home improvements. They can pay for improvements when it is done and without having to pay interest on the full amount.
Excess funds may also be used to purchase short term assets like furniture for example. However it is poor financial management, to use your bond facility to pay for short term debt. If you choose such an option you must be disciplined enough to keep the repayment short as well.
You can also use this kind of bond to pay off your high interest debt like credit cards, bank overdrafts, retail accounts, personal & micro loans etc. The amount you save on interest could be invested into your bond for additional savings. Once again you must settle such debt as soon as possible if you want to derive any savings.
3. Covering Bond (Mortgage)A covering bond may be registered over immovable property to serve as security for a bank overdraft. Such a bond may be a first, second, third bond, etc.
However it is not easy to obtain a covering bond from another financial institution once they have registered a first bond over a property. The reason for this is that the first financial institution will have first claim to the property in the event of liquidation.
4. The One Account
This kind of bond caters for all of your transactional banking needs. The single facility, secured by your home, fulfils all the functions of a cheque account, overdraft, personal and home loan.
Basically it can be viewed as single credit facility or one large overdraft. It is designed to save you money because of lower rates, but you run the risk of losing your home if you cannot keep up with the payments.
These accounts are expensive to set up due to the higher monthly admin fees and structuring fees.
5. Interest Only Bond (Mortgage)
The interest only facility allows you to repay only interest on a loan for a predetermined period or over the entire loan term. The capital is repaid at the end of the term.
This allows you to repay interest only on a loan, either for a specified period or the entire loan term, and repay the capital by a cash injection or bullet payment at the end of the facility.
This product is common in the overseas markets, but in SA it is relatively new.
Although this might seem like an attractive proposition for some, because of lower monthly repayments, there are a few factors to consider.
You will remain in debt for much longer, and pay much more in interest over the term of your loan, because the capital amount never decreases.
Your financial position will worsen if interest rates go up compared to an ordinary home loan. The reason for this is that the interest of a conventional home loan decreases over time, but with an interest only loan your interest repayments will increase with a increase in interest rates.
6. First-Time Home Loan
This uniquely structured facility assists first-time home buyers to buy property without any upfront cash to pay for transfer and registration costs. It is appropriately also known as a 108% home loan.
The bank will borrow you the money to pay for the full purchase price op the property (100% of the loan amount) plus they will include transfer and registration costs (additional 8%)
The interest on such a loan is higher than the norm, due to the higher risks associated with such a loans. However as soon as you have built up some equity you could then re-negotiate a better rate.
For more information on debt consolidation, bonds and other related articles go to www.globalproperty.co.za