Save with an access bond

Tapping into your home equity to pay university fees, consolidate credit card debt or even to buy a new car is becoming commonplace amongst homeowners.

While there is no doubt that this is a cost efficient way to finance major purchases it may not be a good idea in the long-term. Regular withdrawals from your home loan account extends the duration of the bond repayments, which means that you're paying interest for longer.

However, smart use of the equity in your home can save or even make you money if you do it carefully. Getting the most leverage out of your home equity requires discipline, knowledge and a financial plan. Here are some tips to help you maximise your money saving and growing opportunities.

Tip 1: Increase your insurance excess
Raising the excess amount on motor and homeowners insurance policies can mean big savings on insurance premiums. If you increase the excess payable on a homeowner’s policy from R500 to R1000 you could cut your monthly premium by as much as 25 percent.

However, many people don't do this because they fear they may not have the necessary cash available in the event that they need to make a claim. With low-interest cash readily available through a home equity line of credit you'll have the security and confidence you need to raise your deductibles and reap the savings!

Yes, you will have to pay interest if you need to access the money in the short-term, but over time, provided that you are a cautious driver and home owner, the savings on the premiums will offset the interest charges should you need to access the money. To benefit even more, take the 25 percent you save on the insurance premium and pay it into your home bond; this will give you the added benefit of reducing the amount of capital you owe.

Tip 2: Save on a car loan
If you are in the market to purchase a new car you could save as much as four percent on interest charges if you 'borrow' the money from the equity in your home.

You will almost always get a lower interest rate on a home loan than if you were to take out a car loan. This is because a car is a depreciating asset so the bank carries more risk if you default on the repayments.

If you got your home loan at 11 percent, but the bank offers a rate of 15 percent for your car loan, rather take the money from your bond. Let's look at an example:

A R150 000 car financed over four years at 15 percent will cost you R4123 per month. If you take the money from your access bond at 11 percent it will cost you R3841 per month. This is a saving of R282 per month or R13 536 over the period of the loan. The only way this will work is if you pay the full car instalment into your bond each month — don't be tempted to pay it over the life of the loan as it will cost a small fortune in interest charges.

Tip 3: Save on education fees
Many people are taken by surprise when it comes to the cost of educating their children. In the past parents only had to pay for a tertiary education, but nowadays we have to come up with a fair amount of money from when our kids turn five, and perhaps even younger if they are going to a pre-school.

Many parents can't afford to pay university fees in cash, so a student loan is often taken out for this purpose. Although the loan is often procured in the child’s name the parents have to sign surety and the buck stops with them if the bill is not paid.

Whether the student pays for this loan of the parent helps them out, it is still a costly way to borrow money. It may not appear expensive at first glance, but the way the loan is structured means that only the interest portion is payable while the student is studying. After the student graduates they then have to pay off the capital, which is usually refinanced for another three years. So essentially the interest on this type of loan is paid twice.

Borrowing money to finance an education is acceptable by virtue of the fact that the individual will be better equipped to get a job and hopefully earn a better salary. However, the same rule applies as for the car loan: pay extra money into the bond each month to avoid paying additional interest in the long run.

Tip 4: Take advantage of a good property deal
If you have almost paid off your home and are thinking of buying a second property as an investment, you could take advantage of the equity in order to put down the deposit on a new home. However, it's important to crunch the numbers.

If you are going to rent out the property (which should be your intention), make sure that the income covers the bond repayments. You will be used to paying off a bond on your first home, so you should be able to comfortably afford both properties.

Once the bond on your primary residence is paid off, use the extra cash to pay off the investment property. This will enable you to enjoy an inflation linked investment for your retirement. As an added precaution do some calculations on how increasing interest rates will affect the repayments: add up to six percent onto the current rates. If you can afford a six percent increase then you should have interest rate risk under control. Don't forget that rental income is taxed, so factor in how much of the monthly rental will have to go to the taxman.

Tip 5: Stash extra cash in your bond
Use that 13th cheque or unexpected inheritance to pay off your bond a bit quicker. By parking your excess funds in your bond you will enjoy a return of whatever the interest rate is on your bond — tax free! This is also a great way to build up an emergency fund.

Articleby: Iona Minton -