Cape Town - The age of the access bond is over and many investors and small business owners could get a nasty surprise when trying to access additional capital through their home loans, Gary Palmer, CEO of independent lender Paragon Lending Solutions, told Fin24.
The attempt to use the access bond facility might even trigger changes which result in new, unattractive rates from their bank.
"Many South African entrepreneurs used to rely on their access bonds to fund new ventures, new investment properties and, sometimes, as short-term operational capital when cash flow was tight," explained Palmer.
"Years ago one of the big selling features of home loans was that you could get a revolving access facility, which meant that if you paid it down you could still have the facility available if you ever needed the money again. So, you always had access to the money as well as the rate at which you could borrow, since a home loan was always the cheapest in the market."
Many times one could even access it online and make a transfer - critical when one had to move quickly to close a deal, for instance.
Palmer explained that after the global financial crisis regulations were increased. This included the National Credit Act in SA as well as the Basel regulations. It meant banks had to hold a lot more capital when they advanced loans - even when the credit available to a customer had not been accessed yet, like in an access bond facility.
"Banks felt penalised for holding open facilities, but not earning on it. Many, therefore, cancelled these facilities and customers had to almost reapply under new terms," said Palmer. "Currently there are not many lenders in the market that offer a revolving facility. They mostly just have a reducing facility."
Palmer's advice is for investors and small business owners who want to be able to move quickly on accessing finance when they need it, to apply in advance for a facility before it is needed. Then it will be available when they need it in future.
"There are funders like us who have put such facilities in place for customers since we are not governed by Basel. Then, when a customer needs the money, we can just transfer it. If you use it you pay, and if you do not use it, you do not pay," said Palmer. "Basel really relates to the banks in order to protect investors and depositors of money."
Palmer said investors should be aware that they may not even be looking for additional credit and any changes to their loan facility with the banks will still trigger new rates.
Examples could be a change in suretyship, withdrawal of a share portfolio as security, or even an addition to the deal that would logically seem appealing such as the addition of security to the facility.
‘Access bonds’ remain popular
According to Praven Subbramoney, CEO of Private Lending at FNB, an access bond - known at FNB as a Flexi Facility or a Single Facility from FNB and RMB - remains popular with clients as it offers both flexibility and convenience.
"It’s important to understand the difference between access to additional pre-paid funds and access to equity in your property. Your typical ‘flexi’ facility allows you access to pre-paid funds and accessing these funds will not change the terms of the contract," said Subbramoney.
"However, in order to comply with relevant regulatory requirements the bank is obliged to re-contract with clients who want to unlock equity in their property that requires a change to either the loan term, bond amount or collateral (property) type."
Subbramoney explained that since 2008 bank regulation governing banks has changed resulting in stricter capital and liquidity requirements for banks worldwide, which has had a direct impact on the cost of funding.
Therefore, clients entering into a new credit agreement are assessed for the new contact and the interest rate on the new contact may be lower or higher than a previous agreement.
"However, mortgage lending still remains one of the cheapest forms of credit for clients today and utilising funds from a facility is the most affordable form of funding, when compared to unsecured lending," said Subbramoney.
According to Tim Akinnusi, head of sales and client value management at Nedbank Home Loans, it depends on the scenarios in which clients can access funds from their home loan whether a person can access their home loan for additional funds or capital and if the bank has the right to change the credit rate, for instance.
"Firstly should clients want to access the additional funds paid into their home loan over and above their monthly repayment, Nedbank will not change the rate and clients can access the funds via internet banking," said Akinnusi.
"If clients want a re-advance to access the capital they have paid into their home loan over time, then we will do a credit assessment to ensure they can still afford the loan and currently we do not re-price the loan. The last scenario is if the client wants a further loan beyond their initial loan value, then we will re-price the loan as it is a new credit agreement."
Akinnusi added that clients often use their home loans to access surplus funds paid into it. If clients have funds available in their home loan account, they are likely to use it more often than a credit card, overdraft or personal loans as the cost of funds in their home loan is generally the cheapest in the market.
"As part of our efforts to educate clients on the benefits of home ownership and how to optimise their home loan, we advise clients to have their current accounts with Nedbank when they take up a home loan with us, as this enables them to make use of the access bond facility to transfer funds from their home loans," said Akinnusi.
Nondumiso Ncapai, head of business development at Absa Homeloans, explained that the banks’ lending and pricing policies align with their risk appetite in response to the current economic climate and, therefore, need to be flexible and adaptable to ensure a consistent, responsible approach to lending.
In situations where a customer approaches the bank for additional funds on their existing home loan, this would result in a new credit and affordability assessment being done, and a new agreement being entered into between the customer and the bank. Therefore, the interest rate could change in line with the bank's pricing policy and the customer’s risk profile at that point in time.
"Customers focusing on growing an investment portfolio or who operate in the small business environment are urged to engage their bank or financial adviser," suggested Ncapai.
Absa refers to an "access bond" as Flexi Reserve and Ncapai said this allows customers to access funds they have already paid over and above the minimum monthly payment on their home loan - that is additional funds that are over and above the minimum required monthly payment on your loan.
"A benefit of Flexi Reserve is that, should the need arise, and in case of an emergency, customers have access to this money. Paying more than what is required will result in a huge interest saving to customers as the additional payments will reduce your outstanding balance," said Ncapai.
"The contrary is also, however, true and bondholders using their Flexi Reserve must keep the following in mind: if you continuously withdraw funds from your available reserve, your outstanding balance will increase over a period of time. It is important to note that accessing your excess funds in your Flexi Reserve does not affect your rate - that is your rate does not change if you withdraw some or all of your pre-paid funds."
Ncapai said it is important that customers maintain a healthy credit profile and record with the bank. This will allow the Flexi Reserve facility to be available for use by customers for the duration of the loan.
"Customers making use of their Flexi Reserve facility on their residential property are urged to discuss the viability of this decision with the banker and or financial adviser as there are solutions available to address this need," said Ncapai.
"As responsible lenders, a bank’s lending and pricing policies align with the bank’s risk appetite in response to the current economic climate and therefore need to be flexible and adaptable in order to ensure a consistent, responsible approach to lending thus being supportive in maintaining a positive and competitive lending culture.
"And in all instances, (this means) doing all possible to ensure that a customer in not placed in a negative financial position when using their home loan for additional finance."
Access prepaid funds
According to Andrew van der Hoven, head of home loans at Standard Bank, the Accessbond offering that allows one to access prepaid funds has always been available to customers.
The prepaid funds will be made available provided the Accessbond criteria is met. The ability to access additional funds up to and over the original loan amount is also available to customers, however, a full credit assessment, affordability and risk-based pricing will apply.
"The Accessbond facility still remains an attractive proposition for small businesses and entrepreneurs in that surplus funds can be put into the bond to reduce interest rate or finance charges, but can be accessed as and when required," according to Standard Bank.
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