Most consumers will have or will need a home loan when purchasing a house as, generally, it is the largest amount a consumer will borrow in their lifetime. It is well worth the time to understand how to use your home loan responsibly to capitalise on the low cost borrowing that it offers. “At a very basic level, a home loan is a sum of money lent to you by a financial institution that uses a secured asset, for example the property you are buying, as security against the money you borrow,” says Brian Katjaerua, Head of Home Loans at FNB Namibia.
Without a home loan, most consumers would not have a roof over their heads, or would be left having to rent property indefinitely, or at least whilst trying to save up the funds to acquire property on a cash basis. The fact that over the long term, property prices are usually expected to increase at or around the level of inflation, or even higher, makes this a challenging purchase.
The structure of a home loan allows consumers to borrow a large sum of money, larger even than annual incomes, to purchase a property and pay it back over a long period of time.
“Unlike with a personal loan, or credit card, financial institutions have a way of recouping some of their losses if you fail to service your home loan,” says Katjaerua. “This essentially means that the home loans interest rates are almost without exception the cheapest form of finance that consumers can access.”
Aside from the benefits of long-term repayment terms, you can also use your home loan as a flexible money management tool. One particularly underutilised tool provided by FNB, is known as further lending. “Further lending is actually a fairly simple concept with a lot of power allowing you to capitalise off the low cost of your home loan to fund many other borrowing requirements,” states Katjaerua.
Further lending works by using the equity, which is the difference between the value of your property and what you owe on the property, available in your property, to unlock further funds from your home loan. By registering a bond in the Deeds Office that is higher than the one you need to facilitate the initial purchase of your property, you have access to credit on short notice and would not have to again go through a fairly lengthy process of registering a further bond in the Deeds Office. FNB calls this product a Future Use Bond. “Because the home loan product is structured in a way that you only pay interest on the outstanding balance, all the extra funds you pay into your home loan effectively earn you a return at your home loan rate of interest, whilst choosing our Flexi product option would allow you to again withdraw these funds at no costs,” says Katjaerua.
Imagine you have N$30 000 of school fees due at the beginning of the year. If you pay this from your future use facility as a homeowner, you will pay the same interest on this borrowed money as that of your home loan. Assuming an interest rate of prime, currently 10.25%, the interest you will be charged over the first year will be around N$3 053, compared to a personal loan with, for sake of illustration at 20% interest rate, resulting in N$5 657 in interest over the first year. This would result in a saving of N$2 604 in the first year, with further benefits also accruing in future years. It is also important to further note that the repayment on the home loan would be around N$500 a month cheaper than the unsecured loan used in this illustrative example.
“Also, any home loan instalment would always be lower than that on an unsecured loan instalment, even at the same interest rate, by virtue of the longer term available for repayment. As long as you don’t finance items such as holidays, a car or school fees over the full 240 months (20 year) period of the home loan, and as long as you commit to paying off these debts over shorter periods, and where possible look to paying more than minimum required payments the bank expects of you – you will certainly receive the benefit of the savings in interest through the power of our further lending facility on home loans,” says Katjaerua.