Understand the implications when drawing from your home loan

If you want to draw down on the equity built up in your property, you may be in for a nasty surprise.

home loanParagon Lending Solutions recently issued a press release warning investors and small business owners that if they try and access additional capital through their home loans, they may trigger changes which could result in higher interest rates.

This is particularly true for individuals who financed their homes prior to the financial meltdown in 2008. Since the credit crisis, banks face more stringent funding criteria through Basel III requirements while the recent amendments to the National Credit Act tightened the amount banks are allowed to lend based on customer affordability.

According to Paragon, if your original bond was prime minus two percent, a new bond issued today would be closer to prime and any changes to your loan facility with the banks could still trigger new rates. “Examples of this could be a change in suretyship, withdrawal of a share portfolio as security, or even an addition to the deal that would logically seem appealing such as the addition of security to the facility,” says Gary Palmer, CEO at Paragon Lending Solutions.

Praven Subbramoney, CEO of Private Lending at FNB confirms that since 2008, regulation governing banks has changed, resulting in stricter capital and liquidity requirements for banks worldwide. This has a direct impact on the cost of funding. “Clients entering into a new credit agreement are assessed for the new contract and the interest rate on the new contract may be lower or higher than a previous agreement”.

Accessing pre-paid funding vs unlocking further equity

Before you apply to draw down funds from your home loan, you need to understand whether the money will be coming from pre-paid funding, in other words money that you added into the home loan over and above your monthly repayments, or whether you will be borrowing from the equity in your property.

Your typical access bond or “flexi facility” allows you access to pre-paid funds; accessing these funds will not change the terms of the contract. If, however, you want to unlock equity in your property that requires a change to either the loan term, bond amount or collateral (property) type, then in order to comply with relevant regulatory requirements, the bank is obliged to re-contract with clients.

Andrew van der Hoven, Standard Bank’s Head of Home Loans, advises that before drawing on your home loan you need to carefully consider the reasons for making any changes to the home loan and make contact with your bank to understand how this affects you.

If you have a typical access bond where you have paid additional funds into the account over and above the monthly installment, then you can draw down on this with no changes to your interest rate, as effectively you have paid the funds in advance.

If however you want a re-advance or future advance, you will have to undergo the new affordability rules and this could affect the interest rate charged.

Nondumiso Ncapai, head of business Development at Absa Home Loans explains that a re-advance is where the customer is able to apply for the loan up to the original amount that was borrowed at the outset of the loan. A further advance is where they require more than the original loan amount. In this case you would need to go through a registration process to register an increased bond amount.

Absa is the only bank which has the option of managing the additional loan as a sub-account linked to the primary home loan, and therefore the new interest rate would only apply to the new loan and would not affect the existing home loan rate.

Further reading on home loans

Tim Akinnusi, head of sales and customer management at Nedbank Retail confirms that withdrawals from additional savings will not affect interest rates but withdrawals on equity will require a new credit assessment. “In the case of clients seeking a further loan beyond their initial loan value, then we will re-price the loan as it’s a new credit agreement,” says Akinnusi who adds that even with the potentially higher interest rate, the cost of a home loan remains the cheapest form of credit.

In a nutshell, if you have used your mortgage as a savings account and put extra funds in, then there would be no change to your home loan if you made a withdrawal up to the amount you have saved. If you want to extend the period of the home loan, or use the house as collateral to take a further loan, you can expect to pay a higher interest rate and possibly further registration costs.

Make sure you understand whether these costs and interest rate will affect your entire home loan amount or only on the new amount you are currently applying for.

This article first appeared in City Press.