How you can turn your mortgage into an asset

WARREN THOMPSON:  With the purchase of a home being the single biggest investment for most South Africans, how can we turn a home, which is really a  lifestyle asset, into a financial asset? Here to explain this to us is Leonard Kondowe from Rawson Finance. Good evening, Leonard.

LEONARD KONDOWE:  Good evening, Warren. How’re you doing?

WARREN THOMPSON:  Very well, thanks – and yourself?

LEONARD KONDOWE:  Not very well, thank you.

WARREN THOMPSON:  Has Cape Town received any rain yet? We are all desperate to know.

LEONARD KONDOWE:  Eish. Unfortunately not yet.

WARREN THOMPSON:  Well, there are lots of clouds here on the Highveld, so we’ll be sending you some rain hopefully in the next few days.

Leonard, we wanted to talk about this idea of turning your mortgage into an asset. For me, a house, my home, is a lifestyle asset. It’s something I’ve put money into and I don’t see a lot of money back until I sell it. What are some of the ways that we can start to think of how our homes and our mortgages specifically can become assets, where we can actually either extract monetary value or save ourselves money and make it a true financial asset? You’ve got some ideas on that. What do you think?

LEONARD KONDOWE:  Definitely a lot of factors. When you are looking at your mortgage, the normal home loan is for 240 months. That’s a 20-year period. Because of the period – it’s quite long in itself – your minimum repayment is much, much lower.

What normally happens is the following. Let’s say you want to finance some sort of short-term credit, like you want to buy a car for which on average you are looking at a five-year payment term. If you have to tap into your bond to finance that particular asset, it actually does help. But I wouldn’t advise anybody to take that particular credit, using your mortgage to buy a car, and then to stick to the minimum repayment and pay it over the same period, like over 20 years again. Then it’s not worth it.

Let’s say you are using your mortgage and accessing some funds from your mortgage. If you’ve got sufficient equity in the bond, then you finance it and just make sure that you pay that extra so that your vehicle portion should be paid off within that [same] particular period. Then you’d be benefiting. But if not, it’s not worth it. But it is definitely, definitely, an asset that you can use.

WARREN THOMPSON:  Leonard, I remember about 10 years ago it was very easy to take out money that you’d paid into your mortgage. I understand that these days you can only take out money based on what you have prepaid, I guess, ahead of what the loan repayment dictates. Is that a standard feature now of home loans – that you can only get what you paid in advance, or prepaid into that home loan, as opposed to getting access to the capital that you’ve repaid?

LEONARD KONDOWE:  Ja. If you look at it now, most mortgage loans come with what are called access facilities. Prior to the NCA coming into effect, yes, indeed it was much easier then. But now it’s no longer the case. Now you can only take out what is above your minimum repayment.

So let’s say if you are paying an extra R200 or an extra R1000, it’s only those extra funds that you’d be able to have access to. That has indeed changed. But a lot of people are using that facility. They pay in more, and when they need the money they can tap into their bond. It’s an easy process. It’s a very efficient way of doing it as well.

WARREN THOMPSON:  Those returns that you get by paying into your mortgage ahead of the repayment schedule, so to speak, those are the best returns that you can get for your cash. If you are going to keep your money in a short-term fund or a money-market account, the home loan is still the best return that you can get on your money.

LEONARD KONDOWE:  Remember, your mortgage interest is always going to be calculated on your remaining term, and also the balance itself. So anything extra that you pay in – let’s say you’ve got R1 million worth of a mortgage at prime now, at 10.25%, and you’re dependent on that, and your repayment is about R9 816. Should you decide to pay an extra R1000, which takes you to R10 816, already the period, the repayment term, is reduced to 16 years. And by doing so obviously you’d be saving a lot of money in the longer term. So over the period of the bond you’d be saving over R380 000, which is quite a lot of money.

WARREN THOMPSON:  The trick is obviously to pay back that home loan as quickly as possible. What levers do people have? I did that exercise where you mentioned that if you asked the bank reduce the term of the loan from 20 years to 15 years. In my personal example it would save me as much as R1.3 million over the course of that loan. How easy is it to re-finance or certainly ask for a different interest rate from your bank, as you pay down the capital amount? Are banks fairly negotiable about that? What has the experience been with trying to get a better rate, which is certainly a challenge. It’s been tougher to get lower and lower rates below prime. But in your experience are banks negotiable and open to that?

LEONARD KONDOWE:  Ja, banks always are. What you must remember, as well, it’s the loan-to-value percentage that you have to look at.

So let’s say that you are looking for a 100% bond, okay, the risk to the bank is quite high, and obviously they’ll be pricing for risk and they’ll be charging you a higher premium. But if you are putting down a bigger deposit, you are reducing the risk in the bank’s perspective. It’s also profile-dependent.

Warren, if you look at it in terms of the area where you are buying, and in terms of the size of the deposit you’ll be putting down, all those factors do play a bigger role in terms of what sort of interest rate you’ll be getting.

Most of the time we’ll say to the client, make sure you at least put down a deposit. But, as you know, it’s not easy. Most of the time people will be going for a full bond, 100%, and you and I know gone are the days of prime-minus-two that we used to get prior to 2008. Now most bonds are at prime or prime plus. If you are 0.5, 1% below, those are top-notch clients with lower loan-to-value percentage bonds.

So the secret and the trick is you have to at least put down a deposit. That does help a lot when it comes to negotiating the rate, because the banks will always say: “You know what, we are willing to give you so much money and from our point of view you are not contributing much to this. As much as we can see you are a good client, you must also remember that there is a higher risk you are presenting to us here.” So that does limit negotiations when they rate negotiations.”

Remember, nothing stops you from settling your bond. Even though your bond may be granted over a 20-year repayment term, 240 months, nothing stops you from repaying your bond in 10 or 15 years. Nothing.

But what is critically important is that the shorter your repayment term is, the more you’ll be asked to prove affordability. A shorter term presents the challenge of you proving affordability, because you’ll need to be earning more money to prove that you can afford the loan.

But if the term is somewhat longer, that helps you in terms of how much money you can produce.

WARREN THOMPSON:  Leonard, one of the questions we’ve seen is the question of increasing your mortgage on your property. It’s been very difficult I think over the last few years with property prices not moving as quickly as we’ve seen at points in the past. But is that still a feasible option? If you put a sizeable deposit down on your property and you’ve seen that property value rise over a couple of years, is it still a worthwhile endeavour, if you need the money, to approach the bank and take out a second mortgage loan on that property, or increase the mortgage loan on that property? Is it cost-effective or how does that stack up in the various options people can use to access the money in their home loans?

LEONARD KONDOWE:  It still does, Warren. It depends on what you want to use money for. You find that a lot people nowadays – let’s say they want to do renovations, or to purchase other stuff – remember your mortgage repayment term itself is longer, and that makes the minimum repayment much lower than when you get, let’s say, a personal loan or whatever it is.

A lot of people say, you know what, my equity has grown now in this particular property. I bought my house for R1 million and it’s now worth R1.5 million. I only owe about R700 000, and I need to access some of this money to finance other projects that I need. It is always a viable option because it is cheaper to do so. And banks are always keen, because they can see your loan to value when you are trying to access those funds. It’s much, much easier for them as well.

What you must always remember, though, is it’s not just about the equity that you have in your house, its’s not about okay, my house is now R1.5 million, and I know I owe only R700 000 and I can access these funds. Unfortunately not. Affordability assessment will always be done on those particular issues, so it will be treated case-by-case. But a lot of clients are finding that it’s a very useful tool. You’ve seen a lot of people buying other properties using that access to their properties.

WARREN THOMPSON:  Alright, Leonard, we are going to have to leave it there. Thank you very much for your time.

LEONARD KONDOWE:  Thank you so much. It was a pleasure speaking to you again.

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