This section looks at ways of using a home loan to finance a business. Let’s take a look at some of the options that are available, as well as the risks and tax considerations.
Here are two of your options:
For most people, their house is their most valuable asset. Usually the only way to purchase a 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 2 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
With this type of bond, you are able to withdraw the difference between the bond limit and the amount owed. So, if you have paid off quite a bit of your bond, this money is available for you to use. If you have an access bond, then you do not need to apply to the bank for permission to withdraw the money you have already paid back on the capital sum.
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:
Its 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: It is also easier for this same reason. 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.
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 asset finance rate (due to depreciation of the asset). Surplus cash can be put back into the bond and provide major savings.
You put yourself at risk
It is advisable 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.
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. To understand the risks of signing personal surety, read Understanding Personal Surety.
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 preferable 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 run! You will benefit from huge savings over a 20 year period if you pay an extra R200 per month.
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 the same interest rate you are charged for your mortgage. 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 show them where the money went.