Although a long-term commitment, your bond is probably the lowest-interest loan you’ll ever get in your life and because of this, it can be quite tempting to consider using your mortgage bond on expenses unrelated to your home like a new car.
But, Rawson Finance Regional Manager Ria Venter warns that your bond can be both the cheapest and most expensive form of financing at the same time, so home-owners need to be extremely cautious when utilising this option.
“Mortgages have lower interest rates than most other types of loans and if you’re extremely disciplined, they can be viable and cost-effective alternatives to taking out short-term or personal financing,” she says.
“For most people, however, using a bond instead of short-term finance results in paying, and risking, far more than they would have if they’d gone a different route.”
A lot of people use their bond facility to finance a car and this could work in your favour, but only if you’re super-disciplined – otherwise it could be a disaster.
If you consider a car that costs R300 000 with an interest rate of 12% over five years, your monthly instalment with vehicle financing would amount to around R6 750.
“If you use your bond to purchase that same R300 000 car, however, you’ll be paying it off over 20 years instead of five and those repayments would drop to around R3 000 per month, something that seems like a big saving on the surface. Unfortunately, by paying that car off over the extended period of your bond, the amount of interest accrued on the loan skyrockets astronomically,” she warns.
It would be a good idea to use your bond to finance a car only if you can afford to keep up with the R6 750 instalment over five years. In this case, you would end up saving on interest, making it a more affordable option in the long run.
READ MORE: Settle your bond in 10 years – here’s how
On the flip side, however, it’s a risky move because, as we know, in life, anything can happen and if for some reason you can’t keep up with the payments, it could place your home at risk.
“Your property acts as collateral for your bond, which means that if anything goes wrong and you can’t afford your monthly repayments, the bank can repossess your home and sell it to cover your outstanding debt,” Venter says.
“Now, if you increase those monthly bond repayments to buy other things, you increase the risk that you won’t be able to meet your monthly obligations when money is tight. If that happens, you’re not just going to lose your new car or whatever you spent the money on – you’re going to lose your home.”
The best time to tap into your bond to finance other items would be if you had excess funds available in your access facility because you’ve been paying it off faster.
“It’s still a good idea to pay the money back into your bond as fast as possible to reduce your bond term and save interest, but it’s far less risky than increasing your original debt,” she says.