The COVID-19 pandemic has forced many organisations to enable their employees to work remotely in an attempt to reduce the risk of transmissions in the workplace. In addition, many schools and higher education institutions had to also adapt to online learning for the same reasons.
Many of our homes were not designed for a “work from home” arrangement, thus we find ourselves using spaces that would have ordinarily been used for quality time with family for working and studying. Most of us feel the need to create spaces for studying and working for an adequate work-life balance. To achieve this, you may be considering building an extra room in your home, building new cupboards or even breaking down a few walls but before you start, here’s what you need to know about home renovations. How to access funds from your home loan for renovations
Accessing extra funds
A home loan can be considered a source of additional funds and there are a number of ways to tap into that. For example, if you already have a home loan and you have paid more than the required monthly payments, you will be able to access those additional funds. People pay extra to save on interest because the largest portion of your monthly home loan payment is initially directed at paying off the interest.
Access to funds through a home loan is considered one of the less expensive financing options today, particularly because interest rates have declined considerably over the past year. By using the equity in your home, you can plan for the renovations you have always wanted. You can withdraw these funds whenever you need them. It is easier when you have an internet banking or banking app profile and a transactional account with your bank linked to this profile for ease of access. Do note that when you withdraw the prepaid funds, your outstanding balance will increase and an instalment recalculation may be conducted. This may also increase your monthly instalment.
What is a Further Advance?
A Further Advance allows you to access the difference between your current outstanding balance and the current value of your property. Let’s assume you have a bond for R600 000 and you have paid off R100 000. Since you’ve bought your property, it has increased in value over time, and you are likely to sell for R700 000 based on a valuation. The difference is R200 000. You can apply for a further advance to the value of R200 000 but this requires you to register a further bond on the property. In actioning this you have to account for the usual bond registration costs and this is subject to a credit assessment.
How does a ReAdvance allow me to access funds?
This is the difference between what you still owe on the original home loan and what you have paid. You can access those funds subject to a credit assessment and a property valuation. However, it’s an excellent concept because in times of need, it can be the quickest way to tap into emergency funds and it’s effectively money that you have already invested. Bear in mind that this does change your monthly bond payment, which will obviously be higher, and may require reworking your term of payment.
Make sure you can afford to take up the additional finance from your home loan
Taking up a Further Advance or ReAdvance on your existing home loan will require the bank to include the additional loan amount onto the remaining term of your home loan. This will increase your outstanding balance and the bank will recalculate your instalment. Your instalment will then increase due to the increased outstanding balance. It is therefore important to make sure that you can afford this increased instalment, as the bank will conduct a credit assessment and affordability check to assess if you can afford to service the additional credit.
What you need to know about obtaining approval from your municipality to alter your property
Banks require up to date and approved building plans to approve home finance. In addition, the municipality also requires the same to issue rates clearance certificates when you are selling your home. Without satisfying these requirements, you will experience challenges when trying to sell your home in future and may even be required to break down what you had built. So, when exactly do you need to get approval from your bank and/or local municipality to make changes to your home?
If the change is structural (this refers to when you are looking to add on an extra room or garage, extend existing rooms or even remove a room), you will require approval to make changes. You don’t need permission for non-structural changes and general maintenance, which includes repainting, tiling or replacing kitchen cupboards.
If you fail to notify your bank of these changes, you are effectively breaching the home loan agreement that you signed with the bank – which you can be penalised for.
More than just saving you the money of paying penalties for breach of contract – although that is, of course, a big one – it’s also important to understand the potential impact of not telling your bank about making changes.
Renovating your home may change the value of the property – and while changes and general maintenance are meant to improve its value, this is unfortunately not always the case. A decrease in value puts your loan at risk as it is tied directly to the actual property, which acts as security for the bank.
Sectional titles home renovations
Since sectional titles are governed by a body corporate, it is always advisable to make contact with your body corporate before making any major alterations to your property, to establish the rules of the complex where alterations are concerned. You may need to inform your body corporate that you will be having construction taking place in your property and may need to adhere to rules relating to times during the day construction is conducted to limit noise for other occupants.
How to ensure your Building Insurance is still in place
Homeowners Comprehensive Cover or Building Insurance adjusts premiums annually to cater for inflationary adjustments in the replacement cost value as seen in your sum insured. This annual premium escalation does not cater for home improvements, which will increase the value of your property and the costs to rebuild or repair your residential property, its permanent fixtures and fittings. It’s important that once you have finished your property renovations or extensions, you contact your insurer to update the sum insured on your policy. With Absa, you can use our online replacement cost calculator to easily work out the estimated replacement value.
An insurance policy provides cover for unforeseen and sudden circumstances. This therefore implies that cover is not provided in the instance of bad workmanship when a property is built and/or when a building is not built according to the building regulations and guidelines. It is important to make use of qualified service providers when building and/or extending your property. Depending on the extent of the work, you may also consider ensuring you have a guarantee from the builder to repair any damages that occur within a specified minimum period.
The insurance cover extends to building materials, fixtures and fittings while the insured property is undergoing renovations/extensions. Theft will only apply if the fixtures and fittings have been fitted. If they are not fitted they must be locked away and any theft claim must have visible signs of violent entry or exit from the building.
Cover for damage due to storm, wind, flood, hail and snow will only be covered if such property is designed to withstand the elements of nature. Protection of the insured property by anything other than a conventional roof is not covered.
Making sure your Life Cover is still sufficient
If you have opted to finance your renovation by taking on a Further Advance or ReAdvance, this may be a good time to review your life insurance policy. Some customers opt to take up (and cede) a form of Life Insurance to cover the debt where it is not a condition of the home loan. This is a prudent action in terms of estate planning to ensure the home loan will be paid off in the event of your passing, which ensures that your family is left with a roof over their heads. To avoid unpleasant surprises, it is also important to update the sum insured to ensure it will cover the full outstanding loan amount when you have renovated the property.