Financing Home Improvements

When dreaming about our ideal homes, wher to find the financing for our home improvement projects usually startles us awake. But a lack of funds needn't be a problem.

With the huge increases in property values that we have seen in Bloemfontein and South Africa in general, there may be ready equity available to fund your home improvement projects.

Financing Sources For Home Improvement

The secrets of financing home improvement projects explained.

The most popular ways to finance home improvement projects are cash(which few of us have an abundance of), personal loans, withdrawing credited funds from the existing mortgage bond on the property, registering a second mortgage bond, or registering a new first mortgage bond over the property.

Cash

If your monthly income allows for a few thousand rands cash, you may consider stretching your home improvement project over a period of a couple of months.

If you choose this option of financing your home improvement, be sure to buy enough material to finish a job. Product ranges get discontinued without warning, so you might not be able to get more of the same tiles next month!

A different approach that works well is saving until you have enough cash to finish the whole of your home improvement project.

Remember to ask for a cash discount when buying material, or before appointing a contractor. There are definate costs involved to retailers if you pay by credit card, so don't take no for an answer!

Except for cash, the other avenues of finance all have costs for you account.

Personal loans

A personal loan can be a viable way to finance a home improvement project, and lenders often advertise personal loans especially for home improvement purposes. But the interest rates charged on personal loans can be very high, because they are unsecured loans.

An unsecured loan in this sense is simply a loan that a lender makes without registering it in the deeds office against the title of the property. The implication is that you will be able to sell your property without repaying the personal loan and still be liable for the balance, even though the property that it was spent on is now long gone. If you don't repay the personal loan, the bank will have to find some other way to get their money back.

An unsecured loan is therefore seen as a high risk loan which attracts a higher interest rate than secured loans such as mortgage bonds.

Personal loans can be very inflexible too. You may not be able to repay the loan quicker than agreed, even if you win the lotto or get a massive christmas bonus!

If you are considering a personal loan, check whether it can be paid off early without penalty.

Existing Mortgage Bond

Withdrawing credit from an existing mortgage bond on the property is the easiest, least cost finance option for your home improvement project involving mortgage bonds.

To use this option, you have to have specified that you would require an "access bond", or "revolving credit", or such similar mortgage bond facility when you first applied for the mortgage bond. This will allow you to withraw funds up to the original loan amount that you have already repaid through the years.

This may only be a few rands if you've only had the mortgage bond for one year, but it could be a considerable amount after repaying your mortgage bond for five years or more.

Your monthly bond repayments will increase to allow you to repay the total loan in the remaining term of the bond, so keep this in mind!

Second Mortgage Bond

A second mortgage bond may be registered against the property to finance your home improvements.

Registration cost for a second mortgage would be much less than registering a new first mortgage. Registration costs depend on the size of the loan being registered. On a property with an existing mortgage bond of R500 000 rand, registering a second mortgage of R50 000 will therefore be much cheaper than registering a new first mortgage of R550 000.

The repayment term for the second mortgage might be a lot shorter than that of the first mortgage. You may also pay a slightly higher interest rate, depending on the equity in your home and your monthly income.

If your property has had a lot of value appreciation, or if your second mortgage bond is in favour of the same lender that holds the first, you may be able to negotiate very favourable terms for the loan.

New First Mortgage Bond

Registering a new first mortgage bond, or refinancing, may be the option that affords you the lowest interest rate.

Mortgage bonds are secured loans, but the lender for a second or third mortgage bond would have to stand in line to recoup a portion of their loan if someone decides to forclose on the property. A second or third mortgage holder therefore have a higher risk on their loans, which may translate into higher interest rates and shorter repayment terms.

Registration costs for a new first mortgage can be a pretty sum, so only consider this option if your home improvement project is a major undertaking.

Mortgage Bond Advantage

One advantage of financing home improvement projects through a mortgage bond is that lenders are usually willing to let homeowners borrow more than the market value of a property for home improvements that will add value to the property.

But the real advantage, other than the low interest rate and the simplicity, is that you can usually repay the loan amount earlier than the term of the mortgage bond states. If you can afford to pay back the extra cash, either monthly or as a lump sum, this will dramatically cut the total interest you will pay.