Can I get a mortgage for more than the house is worth?

A surprising number of reader questions this month focused on building and renovations. Picture: iStock
A surprising number of reader questions this month focused on building and renovations. Picture: iStock

A surprising number of reader questions this month focused on building and renovations, as people seem to be tired of looking at the same four walls during lockdown. With interest rates being cut significantly over the past few months, those who still have incomes may be flush enough to do overdue upgrades


JOHN WRITES:

I am interested in taking out a bond for a house in a new development that is a high-security complex. Am I allowed to take out more than what the costs are to build the house to pay for some extras in the build? 

CITY PRESS REPLIES:

This is a discussion you would need to have with your bank. A bank is unlikely to provide financing above the value of the property. They usually want there to be some equity in the property to provide protection in case you default and the property must be sold. However, if the extras add to the value of the house, that may be a consideration.

Keep in mind that a building loan is different from a regular home loan in that the bank pays out the building loan in tranches as the building progresses.

Should I use my RA to renovate?

JOEY WRITES:
I have a pension fund with my company, but I also have two retirement annuities (RAs) with a total value of R500 000.

I am 56 years old and they are paid up. I am thinking of cashing them in to renovate my house as it is in urgent need of attention.

I have a mortgage of R1.8 million and I need about R250 000 to renovate. Is it a good idea to use my RA money?

I am planning to sell it in 10 years’ time, to move to a smaller house with my husband when the kids are independent.

CITY PRESS REPLIES:
When accessing your retirement fund, you can only take out one-third of your RA benefit as cash, and the rest must be converted into income.

The problem is that, if you “retire” from these policies, the two-thirds will be turned into income that you probably do not need at the moment and would be better left to just grow.

The one possibility is that, if either of the RAs’ current value is less than R247 500, you can fully cash it in.
Keep in mind that, if you retire from a fund, you can get R500 000 out tax-free (assuming you have not withdrawn before).

If you use this benefit for the RA policies, it will not be available when you formally retire from your company fund.

You should meet with a financial planner to make sure you have a proper retirement strategy in place.

You do not want to enter retirement with such a large mortgage, so consider focusing on paying that off over the next  10 years.

Should I take out a new bond for improvements?

TEBOGO WRITES:
I am currently in year 12 of my home loan and would like to make some home renovations by utilising my home loan through refinancing.

My current home loan provider does not offer this option and I have considered switching to another bank for this purpose. I am currently on prime minus 1.75%.

If I do switch, does it mean I have to take another 20-year bond, and would the interest rate be matched?

CITY PRESS REPLIES:
Due to the cost of funding, the discount to prime has reduced significantly over the past few years, which means there is a good chance you would not get the same rate, so it is important to do some research.

You can finance a home loan over as short a period as five years, so that is not an issue.

However, keep in mind that, if you take out a new mortgage, you will pay significant costs to re-register the bond,  so build that into your calculations. 

Discuss your options with your current home loan provider and also consider taking out a personal loan.

Although the interest rate on a personal loan would be higher, it will have lower initial costs and, if you are able to pay it off over a shorter period of four or five years, it may work out to be cheaper.

Whenever you are comparing loan structures, always look at the total cost over the full period.

Help! My debt holiday is over and I have no income

GAVIN WRITES:

As a hairdresser, I’ve been back at work for three weeks. However, clients are scared to come in and I am not earning sufficient income.

I took a debt repayment holiday on my home loan, but that expires at the end of the month and I can only afford to pay half the instalment. What can I do?

CITY PRESS REPLIES:

You need to immediately have a discussion with your bank. The banks will look at each request on a case-by-case basis.

If you had not fallen behind on payments prior to lockdown, it is likely you could come to an agreement where you pay 50% of the mortgage for a certain period of time until your income stabilises.

Once you are able to, try to increase your repayments to catch up on the ones you missed.

Can my employer keep my TERS payment?

VIJAY WRITES:

My company made me take my annual leave during lockdown. The Covid-19 Temporary Employee Relief Scheme (TERS) was paid to them, but they are not paying it over to me.

They said they would reimburse our leave days instead, but I would rather have the money. Can they do this?

CITY PRESS REPLIES:

According to labour lawyer Michael Bagraim, the labour minister made this legal suggestion to employers.

“Employers have been following this route. It sounds bad, but the employer can credit the employee with the leave taken,” says Bagraim.

This is different from when employers make staff take forced unpaid leave.


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Maya Fisher-French 

Personal Finance Editor

+27 11 713 9001
personalfinance@citypress.co.za
www.citypress.co.za
69 Kingsway Rd, Auckland Park

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