Understanding mortgage loans

Home mortgage

This section looks at ways of using a home loan to finance your business. Home mortgages are a common source of finance for many small business owners, particularly if they already have an access bond (see below for details). Let’s take a look at some of the options that are available, as well as risks and tax considerations.

Here are two of your options:

Ordinary bond: For most people, their house is their most valuable asset. Usually, the only way to purchase the house is to apply to a bank for a home loan (also known as a mortgage). The bank pays the seller and then charges you a monthly fee for the cost of lending this money. Making regular repayments on your bond helps to build a good credit rating. Initially the repayments you make only cover the cost of the interest charges, but after a while, they will start to reduce the capital amount of the loan. The more you have repaid, the easier it will be to gain access to additional loans. With an ordinary bond you have two options open to you: Apply to the bank to gain access to the capital amount you have already paid off or apply for a second mortgage on your home.
Access bond: With this type of bond, you are able to withdraw the difference between the bond limit and the amount owed without needing to reapply to the bank. However, this only applies if you have paid off some of the capital sum (if you have only paid off the interest, then you will need to apply to the bank to raise finance).

Why do it?

Many South Africans invest their personal savings into buying a home so a great number of business owners use their home loans to finance their business, especially when they are starting out.

Here are some advantages of using a home loan as a source of finance compared to a traditional business loan:

It's quicker: You don't have to spend time convincing the bank of how viable your business is, therefore raising the finance tends to be quicker.
It's easier: You just need to show that you are able to afford monthly instalments with your disposable income. If you haven't left your job yet, you can also use your salary to take out or extend a home loan in order to help with start-up business costs. It's a convenient line of credit and savings for a small business. If you are already running your business, you can now see why paying yourself a fixed salary makes a lot of sense. A fixed salary gives the bank peace of mind as they know your monthly income, and therefore can determine whether you are able to afford the loan.
It's cheaper: It can be cheaper than traditional business finance (if you are paying on time and even more so if you repay quicker than scheduled). Home loan interest rates are generally lower than the interest rates for other types of loans. Remember that if you do have surplus cash it is a good idea to put this back into the bond as it substantially reduces the overall interest paid on the bond.
You put yourself at risk: It is wise to keep your business and personal assets separate, in order to protect yourself from the risks associated with your business. In reality, this doesn’t happen often, because many business owners are forced to sign personal surety when they raise finance for their business. If you are unsure of the implications of signing personal surety, please read the module Understanding Personal Surety. If you have already signed personal surety, your home might already be at risk. So, it may not seem like such a big issue to use your home as a source of business finance.

At the end of the day, you need to be aware of what you are doing and why you are doing it. This means being fully aware of all the risks involved!

The danger of slow repayment

Are you thinking that it would be a good idea to pay off the amount of the loan you have borrowed against your home loan over a long period of time, say 30 years? The result? Astronomically expensive finance!

It is a good idea to pay slightly more than the instalment, with the aim of reducing the capital and not just the interest. It saves hundreds of thousands of Rands in the long term. There are a number of examples on the internet that show the savings over a 20 year period if you pay just R200 more than the bond repayment amount per month. Click here to read more about how to make your home loan work to your advantage and save on huge interest rates.

SARS

The interest you pay on a home mortgage is usually not tax deductible in your business. You’ll have to prove to SARS that you used the money to earn an income. Make sure your business pays you interest on the money received from the home loan. That way you can deduct the interest from your income.

Bear in mind though that SARS will limit the amount that can be deducted based on the interest received from the business. Be sure to set the interest rate paid by your business to yourself, at the same level of interest that you’re charged by the bank on the home loan. You need to show proof that the money was transferred from your loan account to your business account and how it was spent. If SARS has queries, you will need to prove that the money was used for business operations.

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