Can you use your home as collateral for a loan? The simple answer is yes, of course – but there are some pros and cons to consider.

A loan for home improvement is the most common reason for refinancing your home – whether you want to add features to make the home more comfortable and enjoyable for your family, or to add buildings that you can rent out for extra income. But you might also need a loan for your children’s education, to study and upgrade your own qualifications, or to buy an investment. What is the most cost-effective way to borrow the money that your home ownership gives you access to?

Leveraging equity in your home

Leveraging equity in your home is slightly different to refinancing or taking out a loan on a paid-off home. Essentially, equity is the difference in value between the amount you owe on an asset like a house, and the market value of that asset.

If you’re paying off your home loan, that usually means you have some positive equity on the value of your property that you can access through loan facilities offered by your loan provider. Simply put, if you owe R300,000 on your home loan and your home is worth R1 million, you have equity of R700,000 in your property.

Using your home as collateral

Using the equity in your existing bond account can offer you several financial benefits, provided you’re drawing on that equity for the right reasons. Your goal should always be improving your financial position. For example, it might be helpful for the following aims:

• Home renovations
  Upgrades to kitchens and bathrooms, in particular, can add resale value to your property. However, don’t overcapitalise on renovations to the point that you struggle to pay back your home loan, or you can’t sell the house for as much as you have spent on it.
  
  
• Education fund
  Giving your child the best education possible takes long-term planning. You might need financing to cover the costs of private schools and tertiary degrees, and in some cases, the interest charged on a loan on your home equity could be lower than the rates charged on a student loan.
  
  
• Emergency financing
  Ideally, you should build an emergency fund by putting money aside each month in a savings account with easy access, until you have 3 to 6 months’ salary immediately available to cover unforeseen financial emergencies. However, if you’re still building your emergency fund, or you haven’t started yet, an urgent need like medical treatment might crop up and leave you short of cash. In these circumstances, many homeowners have found their home equity to be a credit lifeline. Just be aware that you’ll be taking on more debt that you will have to pay back.

Contact the Nedbank Home Loans team to learn more about leveraging the equity in your home loan when you need to borrow.