By Nico Strydom
A second bond on your home is a loan that enables you to borrow money against the value of your home.
People often take out a second bond to upgrade their home or to consolidate debt. When you take out a second bond on your home, you receive a large once-off payment against a fixed interest rate or linked to a prime interest rate.
Your home is an asset and over time it can appreciate in value and you can obtain a second bond on the basis of your home’s current value. This gives you access to equity. However, a second bond has advantages and disadvantages.
One of the biggest advantages of a second bond is that it enables you to borrow a considerable amount. The loan is guaranteed by your home, which usually is worth quite an amount, and you can therefore gain access to a lot more money than by, for example, taking out a personal loan. A second bond’s interest rate is usually also lower than other kinds of debt, as this kind of loan is considered to be safer because it is guaranteed by a home.
A second bond, however, also entails many disadvantages. One of the biggest is that you place your home at risk. Should you no longer be able to afford the second bond, it could result in the bank foreclosing on your home to settle the debt.
Financial advisors also warn against taking out a second bond to settle debt with higher interest. When you use a second bond to pay of other debt, you are not really paying off debt but merely shifting it around.
The danger therefore exists that you borrow money in the long term for short-term benefits. The best way to receive benefits from the lower interest rate of a second bond, is to use your equities to ensure that you pay the bond back as soon as possible, so that you don’t in the end pay much longer and much more. It requires insight and discipline to make sure a second bond is worth the effort and the money.
Should you decide to take out a second bond, it is essential to obtain several quotations and offers from different financial institutions to make sure you get the best value for money.
So think carefully about the pros and cons linked to a second bond and make sure it is the best option before you sign on the dotted line.
Consumer Finance: https://www.consumerfinance.gov/ask-cfpb/what-is-a-second-mortgage-loan-or-junior-lien-en-105/
The Balance: https://www.thebalance.com/second-mortgages-advantages-and-disadvantages-315697