Let’s start by explaining how an ordinary bond works and then we can move onto second bonds.
Unless you’re a member of the Rockefeller family or you’ve won the lottery, the chances of buying an asset as expensive as a house in cash aren’t very good. Most of us will have to approach a bank or mortgage originator and apply for a bond.
Before your bond is approved the bank will first evaluate your financial situation based on factors such as income, expenses, current debt and credit history. Depending on how much you earn and your expenses the bank will approve your bond for a certain amount. You will then have to decide on the length of the repayment period for the bond. The shorter the repayment period, the higher the monthly repayment will be. Generally, people that are applying for their first home loan will take a bond out over 20 or 30 years to make the repayments more affordable. You’ll be paying the loan back with interest and the rate you’ll be paying back at will be decided by the bank or financial institution. Prime is currently around 8.5% so it’s likely that you’ll get around 11%.
And that’s basically it. You’ll pay the bank back with interest every month until your debt is settled and then the title deed will be transferred from the bank to you and you’ll be the official owner of the property.
A second bond will usually be taken out to cover the costs of renovating or adding on to a property. The process of applying for a second mortgage will be more or less the same as applying for your first bond, except it will be probably be faster because the bank will already have all your details on hand.
Some people also take out a second bond to consolidate their debt. This involves using money from the second bond to pay off all short term debts (Credit cards, personal loans, cars etc.) and pool all debt into one bulk payment. The advantage of this is that interest rates on bonds are lower than other loans so your monthly repayment will be lower. The disadvantage is that you would have effectively turned all your short term debt into long term debt.
Before a homeowner applies for a second bond, there are a few key things that need to be considered:
1.) There must be enough equity on the value of the property. If you still owe the bank a sizable amount of money, it’s unlikely that you’ll be approved for a further home loan. For example, let’s say that you took out a home loan for R2 000 000 and you’ve only paid the bank back R200 000. Because you still owe the bank over R1.8 000 000 it’s highly unlikely that you’ll be approved for a second bond. The bank or financial institution will normally send someone to value your property if you apply for a second bond in the same way they did when you applied for your first one.
2.) You must have a good credit record. If you failed to make your monthly bond repayment or other related debts timeously on more than one occasion, your chances of being approved for a second bond will be that much lower.
3.) You need be able to afford the additional payment on the existing home loan. The bank or financial institution will reevaluate your financial situation to determine whether or not you can afford to the additional bond.
Once the second bond is approved, it will be combined with the existing one and repaid as one monthly amount.
Most financial institutions will give you the option to take out home loans over 10, 20 or 30 years.
This article was written by Jolly_Roger who is an avid gamer, occasional surfer and enjoys the outdoors.