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Second Bonds

How Does a Second Bond Work?

When you take out your first home loan to buy a house the transaction is registered in the Deeds Office and a bond in favour of the bank is registered. The word we generally use is a home loan but bond or mortgage refers to the same thing. Your bond will be registered for a specific amount and you are not allowed to exceed that amount in terms of what you owe on your home loan. Can you apply for a second bond and what is it?

A second bond will be registered over your property when you apply to obtain additional funds over and above the amount of your first bond. You therefore need to have a first mortgage before you can apply for a second mortgage. Every bank or home loan company will have their own requirements for qualifying for a second bond but some basic requirements will apply in all cases:

1. There must be sufficient equity available in the value of your property to be able to register a second bond. If the current value of your property is R1 000 000 and you only owe R200 000 on your existing home loan, you have sufficient equity available. If you owe R500 000 and your property is valued at R500 000 you already have a 100% loan and you will not be able to register a further bond. The bank will do a new property valuation to establish the current value of your house.

2. You must be able to afford the additional home loan repayment on the second bond. As is the case with a first bond, the bank will calculate whether you qualify for a further bond. In terms of the new Credit Act the banks must look at a client’s overall indebtedness before granting you any additional credit.

3. Your existing home loan must be in good standing. Being in arrears or paying late will reflect on your credit record and this will make it very difficult for you of obtain a further bond, even if you qualify in terms of the first two points.

You can use the funds obtained from a further bond to do as you wish, even for personal expenses such as your children’s education or an overseas holiday. You can also use the funds for alterations or additions to your home; this will increase the value of your property and thereby the equity.

During difficult economic times and rising interest rates many people consider taking a further bond to repay all their other debts, this is called debt-consolidation. If you are thinking of doing this, there are some considerations to take into account. Your home loan is structured to pay off a long term debt. Taking out a second bond to repay all your short term debt such as credit cards, personal loans, medical bills and car finance will result in you having extra cash in your pocket as the repayment on the second bond should be considerably less than the total of your repayments on your other debt. What you need to remember is that you will now be paying off short term debt over a much longer period. For example, your car would have been paid off in five years time, now you are going to pay for it for the next twenty years. (if that is the term you select.) Long before then you will have to buy a new car, so this can become a vicious circle.

If you choose to use debt consolidation you need to practice financial self-control—repay your short term debt in full and do not enter into new debt agreements. Rather use the money you are saving in this manner to repay your home loan faster. Taking out a second bond to consolidate your debt should be seen as a “second chance” in life. Don’t mess it up by getting into more debt.

When you take out a second bond the bank will combine this with the original home loan so that you only need to make one payment. The costs involved will include an initiation fee, bond registration fee and the monthly home loan administration fee. The process of registering a second bond should happen faster than when you took out your first bond as there is no transfer taking place, only the registration of the second bond. At the time of applying ask your bank how long they estimate the process will take. In most cases the bank will assist you with bridging finance in the meantime.

If you decide to apply for a second bond, use it wisely.

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