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It’s a great achievement to be close to paying off your home loan. For many, this type of credit takes the better part of around 20 years to pay off. So once the last payment is due, there’s good reason to just clear it off and cancel the loan agreement.
But not so fast! Your home loan could be what helps you with a myriad of financial problems. Here’s why you should consider keeping it open:
1. It’s an unofficial bank account
‘Don’t close your bond account once your home loan is paid off. It’s a bank account like any other. If you keep it open, you could use it to access funds in the future. Also remember that any amounts you pay over and above your monthly instalments lie in an access facility and can be used at a later stage, as needed,’ says Carl Coetzee, CEO of BetterBond.
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2. It’s a cheap form of credit
A home loan is the cheapest form of credit you can get now. ‘The interest rates charged on home loans are usually lower than those on car finance, credit cards and personal loans. That’s reason enough to keep your home loan account open, even if your bond is paid up and you must pay a nominal monthly fee to keep it active,’ says Coetzee.
Of course, interest rates can (and do) change so it’s always worthwhile shopping around every year to make sure you are still getting the best deal.
3. It could help you buy another house
If you’ve always dreamed of owning a holiday home or helping your children buy their first home, your original bond could help.
‘There is no real benefit in cancelling your bond, unless you are selling the property, or you are absolutely sure that you will not be needing to access funds again. The bank will keep your account open unless instructed otherwise. Accessing your bond and paying “cash” for a second property can save you in bond registration costs,’ points out Coetzee.
4. It could help pay for unforeseen costs
As you get older – especially when you head towards retirement – you may not be as cash rich as you once were. Unforeseen costs, such as a roof leak or car break down, could throw your household into a financial spin.
This is where access to cheap credit could come in handy. ‘The longer you stay in your home, the greater the chances of becoming ‘house rich and cash poor’ – you owe little on your home but you’re short of cash for the upkeep or improvement of your property.
‘The good news is that, as the value of your home increases over time, it will create additional equity that you can access to upgrade and renovate your place, but you’ll only be able to do that if your home loan account is still open,’ adds Coetzee.
Closing your account
If you do decide to close your home loan account, remember that you will be liable for bond cancellation fees. You may also be charged additional interest if you fail to notify your bank in advance that you want to close your home loan account. Banks usually need 90 days’ notice.
However, these reasons shouldn’t put you off the idea of closing the account if you no longer want it or need it. It may also be a good idea to close the account if you’re easily tempted to use the money on frivolous things that will just result in you being in debt again.
Whatever you decide to do, be sensible about the timing and know what fees you need to pay before you close your account.
If you’re uncertain, seek advice from a financial advisor who can talk to you about your personal money goals and help you make choices that best suits your needs.
