Choices of mortgage bond

The two most common types of mortgage bonds are the variable rate bond and the fixed rate bond.

Variable rate mortgage bond (or variable bond)

This is the normal, traditional bond which is granted at the interest rate as agreed between the parties, for example, the prime lending rate plus two per cent. Mortgage bond rates are always negotiable and depend on various aspects such as your credit history, the security and the value of the bond. With this type of bond, should the interest rates increase by one per cent, your repayment rate will increase accordingly. Conversely, should the interest rate drop so will your repayment rate.

Fixed rate mortgage bond (or fixed bond)

Here, the interest rate is fixed at a set rate for an agreed period of time as offered by that particular institution. If the rate rises to more than the amount it was fixed at, you will benefit but should it fall you will still pay the higher fixed rate. In this type of bond, the interest rate is loaded to minimise the risk to the financial institution. So initially, it is more expensive than the variable bond. The benefit to this type of bond is that you will know exactly what you will be paying for the fixed period and fluctuations in the interest rates will not affect you for this period.

Variable bond vs fixed bond

Between the two types discussed above, there is obviously not an outright better bond option. You will need to make an educated prediction regarding which option would work out cheaper in the future. Your decision would be based on where you think interest rates are headed, taking into account elements such as the status of the economy and inflation and the length of period for which you fix the bond. The fixed bond could potentially save you money but it could also be expensive if your prediction turns out to be incorrect.

Interest only mortgage bond

This is a relatively new type of bond available in South Africa. It allows you to initially only pay the interest portion of the loan while repayment of the capital portion of the loan is delayed to a future date. This option is enjoying popularity with younger, usually professional, buyers who anticipate their income rising in the future or with those buyers who anticipate being paid out a lump sum at a future date. The downside is that should the expected increase in income or lump sum not materialise, this could result in the bondholder running into obvious difficulties.

Capped rate mortgage bonds (or capped bonds)

These bonds are rarely granted as the institutions have very stringent requirements for granting them. Here, the interest rate is capped at a maximum rate for an agreed period of time. Should the rate increase above the capped rate, you will not pay more. However, unlike the fixed rate bond, you will benefit from a decrease in the interest rates.

Special bonds

Special bonds are also on offer such as the first time home buyers loan. Generally, this bond will cover 100% of the property value. Building bonds are also available for the construction of dwellings. In this instance, the bank will require the builder’s quote and the building plans in addition to their normal requirements.

Access facilities

The access facility to a bond allows you to deposit surplus funds into your home loan and access to the funds when strictly necessary. This is often desirable for bondholders.

Further offerings and options

Other niche and tailored products are available that are variations and combinations of the basic bond types. The different financial institutions offer varying products and on different terms. As usual, bond seekers must do their homework regarding the various products on offer and which institution offers the best suited deal. If you are in any doubt regarding the options and their implications on your finances, a professional, independent opinion will be to your advantage.