Need cash? Borrow from your bond

Private Property South Africa

In the wake of African Bank’s collapse, unsecured lending has come under the spotlight like never before. And justifiably so. Over the past few years, unsecured lending has spiked because many people think it’s the only option they have to finance their borrowing needs. However, a home loan – if you have one – is arguably the most affordable and flexible way to plug the financing gap. So says Timothy Akinnusi, Executive Head of Home Loan Sales and Client Value Management at Nedbank.

Akinnusi explains that accessing funds paid into your home loan is relatively affordable in comparison to an unsecured loan because it is anchored by a fixed asset, and therefore the risk to the lender is perceived to be that much less. As such, a home loan can actually be a useful debt instrument for funding other assets and pursuits – but only if used responsibly.

Short of cash?

Notes Akinnusi: “If you’re short of cash it’s worth considering dipping into your home loan before opening a credit facility or taking out an unsecured loan which can carry an interest rate of as much as 32.1% per year. Even if your bank is charging you prime plus 2% on your home loan, it means you can access credit at an interest rate of just 11.25%.”

Of course, rules apply to using your home loan in this fashion, says Akinnusi. He says that an access facility has to be in place and you can only borrow as much as you have already paid back to the bank.

“If these boxes are checked, you should be able to access the money which can be used to cover expenses ranging from your child’s education and home improvements to start-up business costs and unexpected car repairs. The choice is yours. You can also consolidate your other debts which will reduce the total interest you pay.”

Don’t loan for just anything

However, Akinnusi warns against using your home loan as a “cure-all” for your short term financial needs. Indeed, he warns against the frivolous use of home loans as a cheap or alternative source of funding for consumption-based lending.

Adds Akinnusi: “It’s also important to remember that when using your home loan to fund other purchases or to consolidate debt, it will take longer to pay off your home loan which could eliminate any initial gains made by using your home loan in the first place. As is the case with any lending arrangement, when you take money out of your home loan, pay it back as fast as possible.

“What’s more is that once you’ve paid back what you took out of your home loan, make the effort to pay off more than your minimum instalment. Doing so could shave years and thousands of Rands off the life of your loan.”

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