Many South African homeowners have already done it, and you are considering refinancing your home as well. But do you really have the whole picture about refinancing your home?
This article on refinancing your home is not an advertisement for some bank or mortgage bond company. I will simply do my utter best to give you all the facts.
Tapping Into Home Equity
South African real estate has experienced a huge appreciation in value over the last few years. This means that your home is very likely to be worth more today, than when you bought it, even if you've only owned the home for a year or two!
We South Africans are notoriously bad savers, and for many of us, the "cash" that is hidden in our homes are too much of a temptation to resist. Many South Africans cannot wait to get their hands on that sweet-sweet equity their properties have earned for them.
The most obvious way to tap into this home equity, or buy-sell price difference, would be to sell the house, repay the outstanding mortgage bond amount, and then pocketing the profit.
But there is another way to get your hands on the equity that may have accumulated in your house: By lending money against the security of that additional home equity.
Refinancing means borrowing money
It is very important that homeowners thinking of refinancing their homes realise that refinancing a home means BORROWING an additional amount, over and above the original mortgage bond, against the security of the property.
Good reasons to refinance
Good reasons to refinance your home would be to further improve your immovable property in some way, which will increase the property value. Remember that your home is a necessity.
You will always need some place to call home, and your home equity will make it possible for you to afford another home in the future.
Refinancing your home to fund home improvements is therefore not a bad idea, especially if those home improvements will bring your property on par with the average property in your neighbourhood, and therefore also increase the value of your property. But beware of spending a whole lot of refinanced money on bad home improvements.
Yes, believe it or not, not all "home improvements" increase property values. And spending money from refinancing your home on such home alterations would simply amount to flushing money on loan down the toilet!
Bad reasons to refinance
There are tons of lenders who tell South Africans that the equity in their homes are there to be spent in any way they please. They really do make it sound as if refinancing your home is like winning the lotto!
Some people use the money from their home refinance to take an overseas trip, to buy new furniture, or some other silly purchase that does nothing to improve the value of their homes. That is ignorantly spending money they have not earned, on things with no lasting asset value.
Other homeowners use home refinancing to delay the consequences of their uncontrolled spending and bloated personal debts. Home refinancing allows Mr. and Mrs. Overspender to pay less interest on their debts, and to have less hassles with paying all the different creditors. This just makes it easier for them to get deeper in the hole, instead of being the lifeline that gets them out of financial trouble.
The lender helps them to roll all their retail and personal debts into one large loan, secured by their immovable property. Unfortunately, Mr. & Mrs. Overspender don't receive advice on properly budgeting their expenses, living within their means, and taking control of their finances. They usually just continue on their merry way, spending happily, until the equity in their home is exhausted.
Lenders love refinancing homes
Banks and other lenders just love lending money to homeowners, because real estate values are very stable, and likely to increase over time. Lenders run almost no risk, even if the borrower defaults on repaying the loan amount and interest, if they can structure the loan to be secured against some real estate with sufficient equity.
Banks and mortgage bond companies love this kind of lending so much that they offer this kind of borrower the best interest rates available. Now, have you ever wondered why?
You can lose your house
Lenders know that the chances are very good that they will be able to recover the loan amount by selling the property. So, even if the borrowers end up defaulting on the repayment of the loan, the lender can usually get their investment back, as well as the outstanding interest, penalties and expenses.
A mortgage bond, registered against the title of the property, secures the loan. So, the homeowner cannot sell off the property and run away with the cash, without paying the outstanding loan amount first. This is a much sweeter deal for lenders than an unsecured personal loan. And that is why lenders are willing to offer such good interest rates on this kind of loan.
Of course, nobody refinances their home with the intention of defaulting on the repayments, but bad things do happen. Someone who refinances a property, which they own outright, can suddenly find themselves in a position where they cannot scrape together the mortgage repayment. If this unfortunate situation does somehow occur, they can LOSE THE HOUSE!
Even if your refinance loan is for a fraction of the property value, there is a chance that you can lose your house. Lenders don't just sell off one bedroom remember. The whole of the house is sold, the lenders get their money, and whatever is left (if there is any funds left) goes to the ex-homeowner.
Refinancing is cheap?
The bond registration costs involved in refinancing your home are relatively low, compared to the cost of selling the property and buying another one. The interest rates are very good, because the loan is secured by immovable property. In fact, borrowing against security of title is the cheapest form of borrowing.
Refinancing your home
There can be very positive aspects to refinancing your home, if you refinance for the right reasons. But make sure that you think things through before spending tomorrow's money today.
Tomorrow does come, sometime or another, and you may need tomorrow's money then. So, spend your home refinance loan responsibly.
